Man counting Nigerian's currency (Photo: Suzanne Plunkett/Bloomberg News)
More than two months after Nigeria allowed its currency to devalue, the country is starting to reap some dividends.
In the past two weeks, Exotix Partners LLP and Standard Bank Group
Ltd. have told clients, most of whom fled after the country started
imposing capital controls from late 2014, that they should start buying
naira assets again.
The worst-performing currency this year among more than 150
globally has depreciated 37 percent against the dollar since the central
bank 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 Aug. 19.
“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.
Doubled Holdings
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.
Nigeria’s central bank Governor Godwin Emefiele 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
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.”
Source: Bloomberg
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