International investors, dismayed by Nigeria’s decision to delay a naira devaluation they see as long overdue, will hold back from its stock and bond markets, raising risks of a deeper crisis in Africa’s biggest economy.
The afterglow from March, when an incumbent president handed over power after what was seen as Nigeria’s freest ever election, is dissipating as new leader Muhammadu Buhari shows little sign of following up on promises of economic reform.
Markets have moved sharply in the past week in particular after the central bank announced curbs on dollar funding for investors, as well as for importers of goods ranging from toothpicks to private jets.
The move, meant to conserve foreign exchange, has dashed widely-held expectations of a naira devaluation – the central reform that investors had been banking on.
Since then 10-year bond yields have jumped 1 percentage point to almost 15 percent, stocks have fallen and the naira’s value is plunging in the parallel market, down about 7 percent from early-June levels.
A devaluation to restore the economy to competitiveness is a matter of time, fund managers still believe. In the meantime, they are unlikely to bring back cash they pulled out before the election.
“It will take a combination of weaker currency and higher interest rates to get us back to Nigeria,” said Kieran Curtis, a bond fund manager at Standard Life Investments. “When we compare Nigeria to other oil exporters it hasn’t had enough of a currency adjustment.”
In real terms, currencies of oil-exporting peers Russia and Colombia are 5 and 17 percent respectively below long-term averages. African oil producer Angola also recently devalued its kwanza, which is down 15 percent to the dollar this year
And the price for supporting the naira is high – the central bank has spent at least $3.4 billion since fixing the exchange rate in February and reserves have fallen below $30 billion for the first time since 2005. http:link.reuters.com/huf76v
Devaluation expectations continue to mount. Non-deliverable forwards, derivatives used to hedge against future exchange rate moves, reflect expectations of currency weakening: six-month NDFs price the naira at 225 per dollar, while a week ago the forward price was around 215.
“To me, (central bank measures) are doing more harm than good: you are putting off the inevitable and the reaction you are seeing on rates markets and the NDF shows that,” said Kevin Daly, a fund manager at Aberdeen Asset Management.
“Effectively the bond market is starting to price in a much wider move on the currency.”
