*Rencap sees managed- naira float in short term
*Eurobond oversubscription is no signal of investor confidence
*We should use trade flows, not loans, for trade obligations
A foreign exchange adjustment is in the works in Nigeria, one that could unlock $20 billion in foreign portfolio inflows, according to a BusinessDay survey.
After consultations with policy makers in Abuja, investment bank, Renaissance Capital said in a note February 17 that officials are likely to adopt a managed float in the short-term, driven by mounting dissatisfaction of the investor community over a pegged exchange rate, devoid of free-market principles.
A pegged rate in the last four months has cost Nigeria foreign portfolio inflows likely to have brought relief to the Central Bank’s external reserves, greased the illiquid foreign exchange market, tapered inflation and eased the pain of households and businesses, even as it puts the economy on a better footing. More so, it may douse the need for public asset sales to raise budget funds.
The mode estimate of 15 experts polled in a BusinessDay survey puts the potential inflow at $20 billion (the most re-occurring figure).
The survey audience spanned economists, investment bankers and analysts and was undertaken between Monday Feb. 13 and Friday Feb. 17.
“Nigeria needs to reposition its foreign exchange market to improve the economy. A $1 billion Eurobond is nothing. We should use trade flows to fund trade obligations, not borrowing,” one of the economists surveyed said, with the February 9 Eurobond sale in mind.
Monetary officials have kept interest rates as high as 14 percent after hiking by 300 basis points from 11 percent at the start of 2016 but if foreign inflows which plunged to a nine-year low last year, led by a 70 percent decline in portfolio investments, are anything to go by, it will take more than high interest rates to woo investors.
“If Egypt got $9 billion inflows in four months, maybe we would have gotten $15 billion in portfolio inflows with the 22 percent per annum yields on Treasury Bills,” another surveyed economist said in anonymity.
Last year, African peer, Egypt was in the same shoes as Nigeria, under pressure to allow its currency float to attract dollar inflows necessary to revive a flailing economy and tame a black market that was growing in leaps and bounds.
Today, outside sub-Saharan Africa, the market of choice for Foreign Portfolio Inflows since October, has been Egypt, where authorities devalued the exchange rate, started moves towards a floating regime, hiked benchmark interest rates and secured a three-year credit of about US$12 billion with the Washington lender, the International Monetary Fund (IMF).
In local currency terms, the Egyptian stock index (EGX30) has soared by 53.6 percent since end-October.
“If we saw through the initial naira float, the country could have attracted close to $20 billion in foreign portfolio investments by now,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham, one of the economists surveyed .
The naira has fallen almost 40 percent against the dollar since officials caved in to a float on June 20, but traders say it needs to weaken further, in alignment with market principles, after the Central Bank returned to its old way of forcefully pegging the exchange-rate.
However, officials are likely to loosen the grip on the naira’s foreign exchange rate, according to investment bank, Renaissance Capital, which held consultations with policy makers in Abuja. No timeline was given.
If this materialises, it would come as a relief to foreign investors whose funds are trapped in the country, due to acute dollar shortages and it may set the tone for new inflows into the dollar-starved economy.
“Our key takeaways (from the consultations) were: FX policy may be adjusted in the short term; inflation is likely to slow; any interest rate hikes will be moderate; the economy will grow by less than 1% in 2017; and capital expenditure will pick up, but higher fuel prices imply an increase in the subsidy and upside risk to the budget deficit,” a Feb. 17 note to investors, penned by Yvonne Mhango, Rencap’s sub-Saharan Africa economist, read.
“We think the most probable outcome of an FX policy adjustment is a managed float, possibly a new peg, but a full float is unlikely,” added Mhango, who sees an exchange rate of NGN447/$1 by year-end.
While a hard peg has deterred investor appetite in Nigeria, peer countries South-Africa and Egypt are thriving on the back of market-determined exchange rates.
The Egyptian pound strengthened 2.4 percent to 16.0550 EGP per USD on Thursday, according to Bloomberg data, while the South African rand traded at 12.9 SAR per dollar.
Meanwhile, the naira plunged to new lows at the black market, where most businesses and households source the dollar, to sustain imports, trading at N510/$ yesterday but remains tightly managed by the CBN at N305/$ at the official market. This extends the ever widening gap to N205.
“The Egyptian bonds totalled $4bn and Nigeria was encouraged to borrow more than $1 billion,” Charles Robertson, global chief economist at Renaissance Capital told BusinessDay in response to survey questions.
“Borrowing costs would have been lower if the FX regime was being implemented as planned in mid-2016. Moreover, other foreign capital would have flown in too,” Robertson added.
Foreign inflows into Nigeria totalled $5.1 billion dollars in 2016, the lowest in nine years, according to the National Bureau of Statistics (NBS), as investors dumped naira assets on foreign exchange risks.
Despite the successful sale of a 15-year $1 billion Eurobond which was oversubscribed by $7.8 billion, according to the finance ministry, an idea of the desired rates that the oversubscribed amounts demanded is a better measure of gauging investor confidence in naira assets.
“No one but the finance ministry can give details on the rates the oversubscribed amounts demanded, but Wednesday’s local bond auction gives some sense that investors are pricing in the risk of our FX market conundrum on naira assets,” said Ayodeji Ebo, acting managing director of Afrinvest securities Ltd, who also partook in the survey and put potential inflows without FX peg at $20 billion.
Though oversubscribed, the offer yields at the domestic bond auction on Wednesday, Feb.15, underperformed the yields investors demanded, with the 14.5% FGN JUL 2021, 12.5% FGN JAN 2026 and 12.4% FGN JUL 2036 bonds all returning higher than their offer yields by an average of 346 basis points.
Against this backdrop, talks of how the oversubscribed $1 Eurobond signals investor confidence in Nigeria may be skewed.
“The Eurobond is no signal that investors are now confident in the country’s economy, as they have priced in the market risks with a 7.85% coupon which is 140 basis points higher than the coupon on the previous bond,” said Muda Yusuf, one of the surveyed economist and director-general of public policy advocacy group, the Lagos Chamber of Commerce, who put potential portfolio inflows at $20 billion.
“It’s more a function of our rising external reserves and shows that investors would rather invest in securities that won’t expose them to our foreign exchange risks,” Yusuf said in an interview with BusinessDay.
External reserves have rallied to a near two-year high on the back of improving oil prices and production, and are expected to hit $30 billion by March, from around $28 billion in January.
A comparative analysis of the yields on long term dollar bonds in Nigeria, South-Africa and Egypt showed that investors are highly risk-averse to naira assets, relative to peer assets.
The yield on Nigeria’s Eurobond maturing in 2023 is the highest of all three countries, at 6.24 percent. South-Africa’s Eurobond maturing in 2025 and that of Egypt which matures in 2022 was 5.87 percent and 5.45 percent respectively as at Wednesday Feb.15, according to data sourced from the Bloomberg terminal.
