Foreign Investor Dollars in Lockdown in Nigeria Debt Market
Foreign investors are trapped in Nigeria’s debt market as dollar liquidity dries up due to a lack of fresh inflows.
Some bondholders who sold local-currency securities in March have been unable to repatriate their proceeds weeks after. Dollar inflows in Africa’s largest oil-producing nation have taken a hit from a plunge in crude, which account for 90% of foreign-exchange earnings.
The investors and exporters market where foreigners buy dollars is trading $20 million a day on average compared with when it used to trade $300 million to $400 million per day two months ago, Stanbic IBTC equity analyst Akinbamidele Akintola said by phone.
“Everyone is a buyer of dollars but there is hardly any seller” after the central bank stopped dollar supply since March 20, Akintola said in a separate note earlier this month.
Trapped investors are reinvesting funds in high-yielding central bank bills while they await enough liquidity to get their funds out, said Samir Gadio, London-based head of Africa strategy at Standard Chartered Plc. Yields on the long-dated papers now average 10% to 12% having rallied about 20% in March.
Some central bank debt auctions in late March and early April recorded zero bids across certain tenors. Subscription levels revived again in the past two weeks after foreigners started reinvesting stranded money, Akintola said by phone from Lagos.
Reserves have fallen 12% this year to $33.8 billion, raising concerns that the central bank would soon run out of firepower to defend the currency. The naira has weakened 11% to 425 in the parallel market since March 20 when the Abuja-based regulator stopped foreign exchange interventions, according to abokifx.com, a website that collates street rates in Lagos. The local currency unit traded for 389 naira per dollar on the interbank market as of 3:45 p.m. in Lagos.
Overseas traders are more bearish than locals since memories of 2015 capital controls are still fresh in their minds, Christine Phillpotts, senior vice-president at Alliance Bernstein, said by email.
“Foreign investors need to incorporate the risk and magnitude of potential naira devaluation when determining the relative attractiveness of naira yields compared to other emerging markets whose currencies more accurately reflect current macroeconomic realities,” she said.
Nigerian sovereign bonds have returned 5% this year, compared with the 4% drop in the Bloomberg Barclays Global Emerging Market Local Currency index. The Nigerian market’s outperformance is due to the lack of liquidity. The market is regulator-driven, which is having a lasting effect on interest rates, Omotola Abimbola, analyst at Chapel Hill Denham, said.
Portfolio managers including Ayodele Salami of Duet Investment, Akintola of Stanbic and Samir Gadio of Standard Chartered expect foreign investors to decide their next move based on how the central bank handles the foreign-exchange market after Nigeria lifts a four-week lockdown imposed to fight the coronavirus pandemic.
“The investors who are sitting on naira liquidity because they exited positions and could not get dollars on the way out may wait until the central bank resumes foreign-currency sales in the investors and exporters window, presumably at the end of the lockdown,” Samir said.
©2020 Bloomberg L.P.