Investors interest in Nigeria surges on FX reforms – Businessday

There has been a major surge in investor interest in Nigerian assets following the introduction of a floating currency by the Central Bank, several market sources tell BusinessDay.

“I have been inundated with calls. People are showing tremendous interest, even though the cash is not coming quite yet,” one treasury official at a large financial firm told BusinessDay.

The interest is being fuelled in large part by the extent of the reforms (free floating of the naira, single FX window) unveiled by the Central Bank of Nigeria (CBN), which caught most investors unawares, sources say.

The changes made by the central bank and the fact the CBN is clearing the backlog of FX demand is very positive, according to another international fixed income asset manager.

“Offshore investors will likely return when they see liquidity in the dollar – naira market – this still does not seem to be the case. When offshore investors are able to get money out is when they will likely put new money in,” the source told BusinessDay anonymously as he was not authorised to speak publicly.

The naira firmed to close at N281.50 to the dollar on Wednesday, following a central bank dollar sale to improve dollar liquidity, its first daily gain since the CBN reopened the interbank FX market.

In the non-deliverable forwards market, the naira rose against the dollar , with the one-month contract quoting the currency as firm as N288, after hitting N317 on Monday.

The CBNs move to float the currency has narrowed the gulf between the interbank FX rates and parallel markets where traders were offering it at N330 to the dollar on Wednesday, down from N370 last week.

Nigerian stocks gained 705.81 points or 2.40 percent to close at 30,127.82 points, a major move above the psychologically important 30,000 points level.

Market capitalisation surged N242.17 billion to close at N10.34 trillion.

Foreign portfolio investors are still watching the markets before they dip their toes back in, according to Mustapha Suberu of boutique investment bank, Eczellon Capital.

“They want to see how effective, efficient and transparent FX transactions will be at the interbank market. They also want the initial volatility to play out and have a proper guide on what the true value of the naira may be,” Suberu told BusinessDay.

“Once there is greater clarity on the efficiency of the interbank market and value of the naira, we can expect portfolio investors to flood the Nigerian financial market.”

This may take up to three months, other things being equal, Suberu said.

Foreign investors held $5.4 billion of Nigerian bonds in September 2013 but dumped most of them after the country was ejected last year from JPMorgan’s GBI-EM index – tracked by more than $200 billion of funds.

They will probably need to be convinced that a more flexible and liquid FX platform can be sustained for longer and also likely require higher yields to compensate for risks associated with the Nigerian market before resuming the purchase of naira debt, analysts say.

“With the yield curve being now in negative CPI-adjusted territory, the risks to market rates may still be to the upside if the CBN seeks to anchor investor expectations,” Samir Gadio,Head of Africa strategy and FICC research at Standard Chartered Bank, tells BusinessDay.

“In terms of re-inclusion in the GBI-EM indices, it is still early days. Given the size of the Nigerian debt market and decent secondary market liquidity on the PDMM platform, there may be a case for index re-inclusion in the long term. The index provider will probably want to see a consistent and reliable record of FX liquidity over time,” Gadio said.