Foreign holding of Nigerian debt doubles to 10% says Standard Chartered
Foreign holdings of Nigerian government debt may have more than doubled from around five percent a year ago, according to Standard Chartered Plc and that has helped the naira to appreciate 2 percent since August to 355.49 per dollar, trimming its loss in 2017 to 13 percent.
The improved prospects have let to yield on one-year T-bills dropping around 400 basis points in two months to 18.2 percent although it remains among the highest in major emerging markets tracked by Bloomberg. Yield-starved global investors have piled billions of dollars back into Nigeria, Africa’s largest economy in the second half of this year, attracted by the Naira’s easing after the Nafex window opened in April and today yields on one-year Treasury bills that were above 20 percent for most of the year.
Nigeria’s benefiting from a bullish oil market matched by rampant demand for developing-nation assets. Crude prices have increased 34 percent since June as OPEC members including Saudi Arabia push for output cuts to continue in 2018 and production in Nigeria, which is exempt from the curbs, has risen 15 percent this year to 1.7 million barrels a day excluding condensate estimated at around another 350,000 barrels daily. Foreign reserves are up near $35 billion, the highest in almost three years.
“It’s all looking rosy at the moment for Nigeria,” said Kevin Daly, a fund manager in London at Standard Life Aberdeen, which started buying Nigeria’s T-bills soon after the investors and Exporters window Nafex, opened. “But that could easily change. Will the authorities be comfortable letting the naira drop to 380? That’s not been tested.”
In the longer run, he says, Nigeria will struggle to sustain tight monetary policy, which is key to attracting foreign investors, and import restrictions if it wants the economy to pick up. Output contracted last year for the first time in three decades.
However, Nigerian officials are increasingly confident the naira’s troubles are over for good even if some investors disagree.
Portfolio inflows have risen in the past three months with crude prices rising close to $63 a barrel in early Monday trading and money managers taking heart from a foreign-exchange trading window, where the naira has converged with the black-market rate.
That prompted central bank Governor Godwin Emefiele and Patience Oniha, the head of the nation’s Debt Management Office, to tell investors in London on Oct. 27 that they see the Naira strengthening even further. Finance Minister Kemi Adeosun concurred, saying Nov. 2 the government sees no significant exchange-rate risk as it prepares to raise dollar funding.
But they are some who say Nigeria’s system of capital controls, multiple exchange rates and the trading window known as Nafex would struggle to survive a drop in oil prices or a turn in sentiment against emerging markets, which may come as the Federal Reserve raises interest rates, according to investors including Ashmore Group Plc and Standard Life Aberdeen Plc.
“At the moment, it’s easy for them to manage the current system and muddle through,” said Brett Rowley, a managing director at TCW Group Inc. in Los Angeles, which oversees $200 billion and recently started buying naira debt again after pulling out during the 2014 oil crash. “That could change if we got a significant drop in crude production or prices. That would be a key test to reassure investors they can get their money out even in times of stress.”
But Is yet at untested territories. A drop in Brent crude to around $50 a barrel would probably be enough to push Nigeria’s current account back into deficit, according to Bank of America Corp. On the other hand, the nation’s foreign reserves are rising comfortably.
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