Nigeria’s Naira, yesterday, appreciated by 3.52 per cent to close at
N315.93 to a dollar at the interbank market, prompting calls for foreign
investors to take advantage of the appreciation. However, the naira
suffered a loss in value as it depreciated at the parallel market to
trade at N402 per dollar, weaker than N397 it traded at its previous
session as dollar shortages gripped the official market.
The naira, which hit fresh record low since the central bank floated
the currency on the official inter-bank market in June, first touched
N400 on the black market this month. On the inter-bank market yesterday,
no trade was posted until three minutes before the end of the session,
when the central bank which has been reducing its dollar sales,
intervened, traders said. Only three deals worth $0.75 million were
traded at 305.50 per dollar, a level the market has closed at since
Monday.
Specifically, according to Bloomberg, in the last two weeks, Exotix
Partners LLP and Standard Bank Group Ltd. have told clients; most of
who fled after the country started imposing capital controls from late
2014, that they should start buying naira assets again. The naira which
has been the worst-performing currency this year among more than 150
globally has depreciated 37 percent against the dollar since the Central
Bank of Nigeria, CBN abandoned its peg on June 20, while bond yields
have jumped to more than 20 percent.
The naira strengthened 4.6 percent to 315 per dollar on Tuesday after
falling to a record 350.25 on August 19, 2016. “The cheap naira is
attracting foreign investors,” said Lutz Roehmeyer, a money manager at
Landesbank Berlin Investment, which oversees about $12 billion of
assets. “At 325 per dollar, the naira is too weak” and Landesbank
anticipates a rebound, he said. Roehmeyer’s funds have doubled their
holdings of naira debt, albeit in the form of bonds issued by the World
Bank’s International Finance Corp. rather than the Nigerian government,
to the equivalent of around $9.2 million this month, he said.
The CBN fixed the currency in February 2015 at 197-199 per dollar to
stop it plunging amid the decline in the price of oil, on which Nigeria
depends for 90 percent of exports and the bulk of government revenue.
He relented after 16 months as the country stumbled toward a recession
and foreign reserves fell to their lowest level in 11 years. The naira
has now weakened more than any other major oil currency since mid-2014,
when crude prices started retreating.
It’s lost almost half its value against the dollar in that period,
compared with 46 percent for Kazakhstan’s tenge and 35 percent for the
Colombian peso. That makes it a good time to buy Nigerian one-year
Treasury bills with yields of about 22 percent, Stuart Culverhouse,
chief economist at Exotix in London, wrote in an Aug. 9 note. The
potential return is more than 33 percent if the naira strengthens to its
fair value of 290 against the greenback, he said. In April, one-year
T-bills yielded just 10 percent. Oil Production The trade is not for
everyone, given Nigeria’s outlook.
The economy will shrink 1.8 percent this year, its first contraction
since at least 1991, the International Monetary Fund forecasts. Oil
production has sunk to a near three-decade low of about 1.5 million
barrels a day as militants attack pipelines and export terminals in the
south of the country. While Landesbank Berlin and Exotix say the
currency has fallen enough, others aren’t convinced. The naira will
weaken to 396 by year-end and 515 by the second quarter of 2017,
according to Access Bank Plc, Nigeria’s fourth-biggest lender. Forward
prices also predict worse to come. Three-month non-deliverable forwards
trade at 357 to the dollar, and one-year contracts at 394. The median
forecast of economists in a Bloomberg survey is for the currency to
stabilize at 344 this year.
Sidelines Preferred “The combination of a cheaper naira and higher
yields on naira paper are tempting, but we remain comfortable on the
sidelines,” Brett Rowley, a managing director at Los Angeles-based TCW
Group Inc., which oversees $195 billion of assets, said in an e-mailed
response to questions on Aug. 16. “Restoring oil output would help
assuage our concerns.”
Investors are also yet to be convinced that the naira truly floats.
The central bank sold dollars at 309 last week and may be trying to keep
the rate stronger than 320, according to Craig Thompson of Continental
Capital Markets SA, based in Nyon, Switzerland. The naira trades at 395
on the black market, 20 percent weaker than the official rate. “The
exchange rate is closer to fair value in the eyes of most investors,”
said Andrew Howell, a New York-based frontier-markets analyst at
Citigroup Inc., the world’s biggest foreign-exchange trader. “But there
still aren’t many inflows. You can’t really call it a
normally-functioning exchange rate yet.”
Mitigating Risk Bottom of Form Still, bond investors are closer to
pulling the trigger than they have been in more than a year. They’d be
even more confident if they were able to mitigate the risk of further
depreciation by buying the naira-settled futures that Nigeria introduced
in June, according to Stephen Bailey-Smith, senior economist at
Copenhagen-based Denmark’s Global Evolution Fonds A/S, which manages
$3.2 billion of assets. Nigerian local-currency bonds have lost 17
percent in dollar terms this quarter, through yesterday, compared with
the 3 percent average return for 31 developing nations monitored by
Bloomberg indexes.
The yield on benchmark government naira notes due January 2026 has
climbed 226 basis points since June to 15.08 percent. “We haven’t come
back in to the local market yet, but we’re looking at it closely,”
Bailey-Smith said. “If you can get a yield above 20 percent and hedge
the FX risk, it’s not a bad trade at all. The futures market is intended
to help you do that, but it’s difficult to buy them.”
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