Foreign Bond Buyers Stranded In Nigeria Risk 100% Loss
Foreign investors tempted into buying Nigerian debts paying interest of 13 percent a year ago are unable to move their cash out.
Worse still, the rate that investors earn for lending money to the government by purchasing 12-month Treasury bills has dropped to a 10-year low of 3.2 per cent. Also, the local currency has twice been devalued against the dollar this year, risking losses when the capital is repatriated.
With their cash stranded, funds have few choices but to park in short-term debt. They’re waiting for the central bank to resume foreign-exchange sales that were halted in mid-March after lower oil prices dried up dollar supplies. The economic fallout from the coronavirus pandemic only exacerbated the situation.
“Some people are either stuck in the queue or they have decided to reinvest some of the money,” said Ayodele Salami, chief investment officer at Duet Group, which has an Africa focused fund with investments in Nigeria.
He added: “There’s no level of returns that can compensate you for that risk — because the risk you are carrying is a 100 per cent loss.”
Holders of Nigerian bonds and equities may have as much as $2.5 billion trapped in the country, Simon Kitchen, an analyst with EFG Hermes, said in a note to investors last week.
Bloomberg reports that Nigeria’s central bank is trying to hold the level of the naira stable without running down its foreign-exchange reserves, around $35.6 billion, to below $30 billion. A drop of about 16 per cent in oil prices over the 12 months has cut the biggest source of Nigeria’s foreign-exchange earnings.
The regulator introduced capital controls and restrictions on imports in 2015, when it pegged the naira at between 197-199 per dollar. The official exchange rate was lowered to 379 last week from 360 in March and 307 in 2019.
“We’ve been investing across African markets for about 15 years,” Salami said, adding: “And in 15 years, Nigeria is the only place where twice in less than five years you have a lockdown or a complete freeze of the foreign-exchange market.”
Average yields on Treasury bills that are sold at regular auctions have declined to 1.9 per cent, near the lowest on record, while rates on central bank paper, otherwise known as OMOs, have declined to about 4.0 per cent across the curve. OMOs used to trade in the high double digits. The yield on Nigeria’s government bond due 2026 fell to 6.7 per cent Thursday, compared with more than 14 per cent a year ago.
A spokesman for Nigeria’s central bank didn’t answer two calls to his mobile phone.