Foreign Investors Set Conditions for Re-entry into Nigerian Markets
Foreign portfolio investors (FPIs) have set fresh conditions for re-entry into Nigerian markets, a decision taken after the devaluation of the naira in June 2023. Amidst the ongoing reform in the economy, foreign investors are still waiting on the sideline of the Nigerian markets; watching how policies and events play on rates.
Since their exits in the past few years, both the equities and the fixed income markets have been dominated by local institutional investors.
Backed by regulation, pension fund administrators have continued to channel buckets investing in Nigerian government securities in addition to their portfolio holdings despite negative interest rates.
Nigeria’s double-digit inflation rate has dragged real return on investment lower while the local currency continues to wobble.
This made Nigerian markets unattractive to foreign investors, thus, the very reason for foreign currency shortage in the economy. At the same time, the Central Bank of Nigeria’s (CBN) capital control measure placed restrictions of foreign currencies outflow.
Multinationals and foreign portfolio investors have been unable to upstream foreign currency offshore, causing apathy amidst the MSCI index threat to downgrade Nigeria’s indexes.
After Nigeria’s apex bank’s decision to bite the bullet on FX reform, MSCI halted the plan while waiting for fresh market directions.
Nigeria’s credit ratings could be upturned to B+ in just two years as the government embarked on economic reform, Bank of America (BofA) Global Research said in its latest update by Tatonga Rusike, its Sub-Saharan Africa economist.
Despite the fact that the naira is heading towards convergence, BofA hints about a plan to wait and see the market direction that will create entry points for specific bond recommendations.
“We have a constructive view for the next two years on the credit outlook. We are still cautious on local markets and wait to engage when FX distortions are cleared- multiple rates, restrictions, and positive real rates. We do not think the CBN has the appetite for aggressive rate hikes yet”, BofA Securities said in the update.
President Bola Tinubu’s political capital has delivered fuel subsidy removal and floating the naira with no social protests, according to BofA.
Rusike said with the current momentum, Tinubu’s next big move should be to reduce oil theft – by reforming the security sector and involving host communities near the pipelines.
“If successful, this could increase crude production to 1.6m bpd in 12-18 months, from current 1.2m bpd, barring OPEC limits”, BofA Sub-Saharan Economist said in the note obtained by MarketForces Africa.
It is noted that positive oil prospects plus Dangote refinery coming online represent a potential structural improvement in Nigeria’s outlook.
Rusike emphasizes that Nigeria depends on hydrocarbons for 90% of its exports, at least half of fiscal revenues and about 6% of gross domestic product (GDP). He added that higher oil revenues and increased efforts for non-oil revenue would ease the high debt service burden.
B+ credit rating in two years possible on reforms
Market-implied ratings from bond spreads are already B, adjusting faster than actual credit ratings, Rusike said in the update, adding that markets already pricing B, but more to come. Risks- complacency on reforms
“We think structural improvements will not only deliver the B rating next year, but even further prospects of B+ within two years”.
Nigeria has low external leverage and financing requirements including a manageable external debt-servicing burden. FX reserves are moderate and can absorb near-term external funding constraints. Moody’s Caa1 rating is likely to be adjusted higher too.
Naira is now undervalued post the float
Higher oil exports ($12 billion more) and a liberalised import regime ($10 billion increase in non-oil imports) can still result in consistent current account surpluses over the medium term.
The exchange rate (USDNGN) has moved from overvalued to undervalued, according to the update. “We now see a USDNGN fair value of N680 per US dollar (previously 580). However, USDNGN is likely to trade above this level, with a year-end 700, and a return to 650-680 in early 2024.
“The caution is transition time, aligning rates and still unlocking more USD into the formal market will take some time. When the dust has settled, the value of the naira should be stronger and appreciating”, BofA said in the update.
Late last year, Bank of America said the Nigerian naira was overvalued, then estimated the local currency need to be devalued nears its fair value. #Foreign Investors Set Conditions for Re-entry into Nigerian Markets > Nigerian Treasury Bills Yield Rises to 7%