Declining yields: Local investors shift to foreign currency investments
Analysts have observed that local investors are shifting from murky investment environment into foreign currency investments due to declining yields in the market.
However, with foreign currencies inflows into Nigeria becoming scarce, the Central Bank of Nigeria has also turned to using policies and tools to strengthening external reserve position.
Gross external reserves settled at $36.329 billion on Thursday according to data from the Central Bank of Nigeria’s website.
Analysts list the introduction of long-dated FX future contract and limit placed on domiciliary accounts of the customers.
Following the increase liquidity level in the economy, investors’ free cash flow which has stayed on the sideline then started seeking alternative investment windows.
But Tellimer thinks that local investors’ apathy adds to foreign exchange divergence as CBN struggle to manage Naira exposure.
There is a recent increase in demand for foreign exchange via electronic transfer, the trend that follows restriction placed on individuals from participating in the CBN’s open market operation.
However, spotting the trend, the apex bank reacted with instruction to limit electronic transfer.
In a statement, the CBN limits the amount of FX cash deposits that can be electronically transferred to US$10,000.
“Increased divergence between cash and FX electronic transfers forced this reaction ”, said Ayodeji Dawodu, Equity Research analyst at Tellimer.
Tellimer’s analyst said this comes after a few days of confusion when the CBN appeared to stipulate that electronically transferred FX into domiciliary accounts can only be withdrawn by electronic transfer, while cash deposits can only be withdrawn as cash.
The CBN’s statement and recent tweets clarifying rules for domiciliary accounts are most likely in response to a surge in demand for FX via electronic transfers in recent months and to curtail it.
Analysts said there has been an increasing divergence between electronic transfer and cash deposits.
Naira depreciated to N370 levels against the USD in the less visible electronic transfer market, while the Naira to USD rate remains stable in the cash segment of the FX market at NGN360/USD levels.
Tellimer’s analyst said the recent increase in demand for FX via electronic transfer could be due to a decline in yields in Naira denominated fixed income instruments.
He noted that FX demand via electronic transfer surge following the restriction of Open Market Operations to only foreign investors and local banks.
This saw yields on 365-day bills fall as low as 5% in 2020 from highs of 14% in November 2019.
Also, concerns on the local currency due to decline in oil prices which has moved down 13% year on year to US$56/barrel as of 24 February 2020 and the slide in FX reserve.
The nation’s foreign reserve has slope down 14% year on year to US$36.6 billion as of 21 February 2020.
The trend has pushed local investors to foreign currency investments such as USD Money Market Funds with yields almost at par with NGN-denominated Treasury Bills.
“But CBN is unlikely to change stance on local currency”, Tellimer’s equity research analyst reiterated.
Analysts however stated that the CBN’s latest move could lead to a slowdown in foreign currency investments by local investors, in the absence of new innovative structured foreign currency products.
Although there has been a depreciation of the NGN/USD at the electronic transfer market, which could continue as supply in this segment of the FX market is now limited.
The CBN is likely to maintain its stance and uphold its defence of the local currency at NGN360/USD levels for the foreseeable future.
This will be supported by the low visibility of the electronic transfer segment of the FX market compared to the cash segment, which is widely quoted.
However, the CBN’s stance may change if FX liquidity in the economy declines significantly, especially if oil prices and FX reserves fall below US$45/barrel and US$30 billion, respectively, Dawodu said.
Declining yields: Local investors shift to foreign currency investments
