Market Intelligence

All Pain, No Gain! : In global hunt for yields, Nigeria repels investors


October 17, 2016 | 12:55 am
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A series of missteps leaves the country unable to fund its widening current account deficit with foreign inflows.

When a country with one of the highest sovereign bond yields in the emerging markets (EM) space, is still unable to attract meaningful dollar inflows, then there is something terribly amiss.

This is currently the fate of Nigeria, which is barely hanging on to the title of Africa’s largest economy.

In a world of negative interest rates, the country which has its benchmark 10 year bond yield trading at c.15.47 percent (see chart), should be significantly attracting the attention of carry traders.

Recent data from the National Bureau of Statistics (NBS) on capital importation for the second quarter of 2016 shows that compared to the second quarter of 2015, Equity capital inflows declined by 84.84 percent, money market instruments by 79.93 percent and bonds by 100 percent to zero.

“The decline to zero in capital imported in the form of Bonds is particularly striking when compared to the high of $1000.28 million recorded in the third quarter of 2014,” the NBS said in the report.

It would have helped for a start though if there was passive (or index benchmarked) money obligated to buy the bonds.

Instead the Central Banks mishandling of a collapse in oil prices through outdated capital controls and effective closure of Nigeria’s once vibrant FX market (which 2 former CBN governors have come out publicly against), led to the country being ejected by JPMorgan Chase & Co. from its local-currency EM bond indexes, tracked by more than $200 billion of funds.

The CBN jettisoned its unorthodox monetary policy stance (after 15 months of damage) in June, 2016 and also hiked its benchmark interest rate, which was met with a collective yawn by global investors.

The main barrier to dollar inflows is Nigeria’s dysfunctional currency market, which today has up to 6 different exchange rates for the dollar-naira pair, with the CBN currently using  ‘moral suasion’ to bolster currency, according to Bola Onadele Koko, the CEO of the FMDQ – OTC exchange where the interbank FX market trades.

Nigeria’s current account deficit will balloon to 3.3 percent of GDP in 2016, from 2.6 percent last year, according to Fitch Ratings.

Total foreign exchange outflows through the CBN were equivalent to $2.6 billion in August, according to data from the apex bank regulator.

A worsening of the current-account deficit, is a risk factor for the naira, which has lost some 40 percent of its value this year against the dollar on the interbank FX market, and is close to testing N500/$ in the black market.

Nigeria’s woes contrast sharply with other African peers who are attracting capital to their currencies.

South Africa’s rand gained 6.8 percent in the third quarter of 2016, the most among more than 150 global currencies tracked by Bloomberg, as foreign investors bought a net 21.3 billion rand ($1.6 billion) of South African bonds.

Foreign investors have been net buyers of Kenyan stocks while the shilling is the sixth-best performing African currency this year against the dollar, according to Bloomberg data.

The Kenyan central bank has accumulated $7.5 billion of reserves, enough to cover 5.2 months of imports which is almost a record.

South Africa’s reserve bank has also accumulated some $41.9 billion in net reserves (see chart), while Nigeria’s reserves keeps falling and is currently at its lowest levels in close to a decade.

Foreign investors were net sellers of Nigerian stocks in 2015 and so far in 2016, according to data from the Nigerian Stock Exchange (NSE).

Foreigners net sold N43.39 billion ($142 million) worth of Nigerian stocks in 2015, and year to date have sold N10.71 billion ($35.1 million), worth.

S&P Global Ratings downgraded Nigeria to from B+ to B in September, five levels below investment grade.  Moody’s Investors Service and Fitch Ratings Ltd. had already each downgraded Nigeria to four levels below investment grade in the first half of 2016.

JPMorgan Chase & Co. expects inflows into emerging-market debt funds to reach $40 billion in 2016, a situation Nigeria is acutely unprepared to exploit with the current FX policies in place.

With an economy currently mired in recession, Nigeria is in the peculiar position of receiving all the pains of sky high interest rates, with none of the gains!



October 17, 2016 | 12:55 am
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