Not Even World-Beating Gain Can Lure Foreigners to Nigerian Debt

  • Nigerian naira yields fall below Kenya, Brazil as locals buy
  • Foreign investors staying out of local debt on currency risk

Foreign investors are missing out on the emerging world’s best bond rally as they shun Nigeria’s local debt because of concern the central bank will soon be forced to devalue the naira.

Nigerian local-currency government bonds returned 10.8 percent in dollar terms in the past three months, the most among 31 developing nations monitored by Bloomberg. Average yields fell to 12.86 percent on Nov. 3 from an almost seven-month high of 16.32 percent on Sept. 9, the day after JPMorgan Chase & Co. decided to kick Africa’s biggest oil producer out of its local-currency emerging-market bond indexes, tracked by more than $200 billion of funds.

While domestic investors are piling in, foreigners’ confidence has eroded as currency restrictions imposed by the central bank to stabilize the naira caused liquidity to dry up. President Muhammadu Buhari backed Governor Godwin Emefiele’s foreign-exchange controls, which prompted JPMorgan’s exit, even though they are hindering importers and growth in an economy expanding at its slowest pace this decade. The naira may slump as much as 15 percent against the dollar should the restrictions be lifted, according to Barclays Plc.

“For us, investment in the domestic bond market is more of a currency than a rates issue,” Christian Diclementi, a money manager at AllianceBernstein LP, which has $27 billion invested in emerging markets, said by phone from New York. “We need greater confidence on the outlook for the currency before returning to the market.”

Until mid-September, Nigerian yields were the highest among emerging markets tracked by Bloomberg. Since then, they have fallen below those of Kenya, Brazil and Egypt, which average 16.08 percent, 15.36 percent and 13.03 percent respectively. Yields on Nigerian government bonds due March 2024 dropped one basis point to 12.2 percent by 3:10 p.m. in Lagos, the commercial capital, bringing the decrease this week to 123 basis points.

The rally in Nigeria’s debt was driven “almost exclusively by onshore players” including pension funds and banks, Samir Gadio, the London-based head of Africa strategy at Standard Chartered Plc, said in a note. Foreign holdings of naira government bonds have dropped to less than 10 percent of the total, from 27 percent in 2013, according to Standard Chartered.

‘Missed Out’

Surplus liquidity reached 1 trillion naira ($5 billion) in mid-October after the proportion of customer deposits that lenders have to place with the central bank was cut to 25 percent from 31 percent on Sept. 22, Gadio said, leaving them with more cash to invest.

While overseas investors “missed out on the action,” residents shifted to government debt as the weakening economy damped appetite for other assets including stocks, according to Sewa Wusu, head of research at Sterling Capital Markets Ltd. Growth slowed to an annualized 2.35 percent in the second quarter, from 6.54 percent a year earlier.

“Equities aren’t attractive at the moment,” Wusu said by phone from Lagos. “The third-quarter results were pretty bad. So, most investors are pitching their tents in the bond market, which is why yields have declined.”

For foreign investors, who have to take into account the exchange rate, the risks are still too high, said Diclementi at AllianceBernstein.

Market Rate

“The naira may have to depreciate anywhere between 10 and 20 percent,” he said. “When you’re offered a yield of 13.5 percent, you really need to be certain that depreciation won’t happen.”

They probably won’t consider coming back to the market until the central bank frees up foreign-exchange trading, allowing the naira to find a more market-determined level, according to Lutz Roehmeyer, who oversees more than $1 billion in emerging-market debt at Landesbank Berlin Investment GmbH.

“What keeps us away is that the yield is too low to compensate for the potential devaluation risk,” he said by phone from Berlin on Nov. 3. “Even 16 percent is too low.”

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