Bond investors may be fans of the Nigerian carry trade, but Moody’s Investors Service says it hurts the country’s economy and leaves it vulnerable to outflows when sentiment turns.
The company cut its outlook on Nigeria’s B2 rating, which is five steps into junk territory, to negative on Wednesday. One of the problems it cited, along with “sluggish” economic growth, was the central bank’s increased issuance of short-term bonds to encourage inflows and protect the naira.
The central bank’s stock of so-called open-market operation bills has risen to 17.4 trillion naira ($48 billion) from 5 trillion naira in 2017, according to Moody’s. Around a third are held by foreigners, it said, many of which are carry traders enticed by yields of about 13%.
“To attract foreign investors, the Central Bank of Nigeria is paying high interest rates on these certificates,” Moody’s analysts Samar Maziad and Marie Diron said in a statement. “This policy is very costly, and has a consequent impact on the yields of other government financing instruments.”
The strategy has worked in terms of keeping the naira stable, a key aim of both Governor Godwin Emefiele and President Muhammadu Buhari. It has barely budged against the dollar this year and is Africa’s best-performing major currency after the Egyptian pound.
Societe Generale doubts the trade, which has returned investors almost 30% in dollar terms so far in 2019, will lose its appeal soon. The French bank forecasts that the naira will slip only around 1% to 365 per dollar by the end of 2020.
“Nigerian fixed income has provided excellent returns and attracted large portfolio inflows over the past couple of years,” SocGen analysts including Singapore-based Jason Daw said Wednesday. “We expect this to continue.”
©2019 Bloomberg L.P.
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