Nigeria’s Naira Bonds Look Cheap to Rand Merchant Bank

The worst performing bonds in emerging markets this year are from Nigeria, and they’re beginning to offer value, according to Rand Merchant Bank.

Naira debt, which lost 9.4 percent since December as yields climbed to all-time highs, will probably lure investors looking to reinvest cash or make a bet on the market, said Nema Ramkhelawan-Bhana at the investment-banking unit of FirstRand Ltd. The currency of Africa’s top oil producer may rise after policy makers scrapped a tool for defending it, which was eroding foreign-exchange reserves, according to Morgan Stanley.

While a six-week delay in national elections and worsening attacks by Boko Haram in the northeast helped send the naira to a record low last week, the move by the central bank on Feb. 18 to end twice-weekly dollar auctions will help liquidity and attract inflows, according to Bank of America Corp. Risks remain significant as oil, Nigeria’s main export, resumed a decline the past two days that has seen the price plunge almost 50 percent since June.

“Investors are relooking at the market because from a bond perspective you’ve got your yields at the highest levels ever,” Ramkhelawan-Bhana, a Johannesburg-based Africa analyst at Rand Merchant Bank, said by phone Thursday. There are “cheap assets to be had,” she said.

Naira Bonds

The naira has weakened more than any other African currency over the past six months as the central bank drove foreign reserves to a three-year low by selling dollars in a bid to support it.

It gained 0.1 percent to 198.75 per dollar as 2:59 p.m. in Lagos on Friday. The currency weakened to a record 206.32 on Feb. 12. Yields on local-currency debt due March 2024 reached an all-time high on Feb. 16 before dropping 24 basis points on Thursday to 16.58 percent.

“It’s positive for portfolio flows into local assets,” Oyin Anubi, a sub-Sahara Africa economist at Bank of America, said by phone from London on Thursday. “Eventually, once foreign investors get their heads round this new system, it will boost their appetite for naira assets.”

The central bank, which devalued the naira in November by lifting the peg it used at the dollar auctions, also raised interest rates then to a record 13 percent. Another 2 percentage-point increase will probably be needed because of the naira’s slide, Anubi said. That’s unlikely to happen before the presidential vote, now slated for March 28, she said.

Investors from outside the country won’t want to put their money back into Nigeria until risks stemming from the election delay are resolved, said Ayodeji Ebo, head of research at Afrinvest West Africa Ltd. in Lagos.

Evident Risk

“Foreign-exchange risk remains evident,” he said by phone on Thursday. “Inflows will probably rise after the election and there is a measure of certainty in the political space.”

President Goodluck Jonathan faces former military ruler Muhammadu Buhari next month. The vote was postponed from Feb. 14 after security officials said safety couldn’t be guaranteed as the Islamist militant group Boko Haram escalated attacks. The currency’s plunge to a record prompted the central bank to sell dollars, driving reserves to $32.4 billion as of Feb. 18. The bank has other tools to defend the naira.

The currency could strengthen in the short term as the risk of holding naira assets subsides, Morgan Stanley analysts Andrea Masia and Michael Kafe said in a note on Thursday.

With the auctions scrapped, investors expect that “the central bank will be able to make a stable exchange rate at the interbank market,” Sewa Wusu, head of research at Sterling Capital Markets Ltd., said by phone from Lagos on Thursday. “Increased dollar liquidity will attract investors and favor yield.”

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