Nigeria Offers Higher Rates to Attract Hot Monies

The Nigerian government is offering higher interest rates on financial instruments in a bid to drive foreign currency inflows into the country. Rates on debt instruments have spiked as the authority seeks foreign investors’ participation in a bid to reduce US dollar scarcity.

The market had recorded a prolonged absence of foreign portfolio investors, bringing hot monies into the economy, over negative interest yield. Nigeria’s unfriendly inflation condition had impacted yield in the fixed income market as the government borrowed from the debt market at lower rates in 2023.

In the second half of the year, the monetary authority restarted open market operations, offering higher rates on OMO bill auctions. In 2024, the Central Bank of Nigeria (CBN) raised its interest rate on Treasury bills to double digits to consolidate its FX reform and attract foreign investors.

FX scarcity challenge has dragged the naira down and suddenly the apex bank has woken up to its core mandate to stabilise prices and maintain a stable exchange rate. Foreign investors had pulled out of the Nigerian economy due to capital control measures implemented by the apex bank under former CBN governor, Godwin Emefiele.

Supporting the previous administration of no naira devaluation, Emefiele had used various regulatory measures to block the US dollar upstream by foreign investors. This led to MSCI’s decision to downgrade the Nigerian Indexes from its platform, citing an inability to get dollars out of Nigeria.

Given a steep money supply reported recently, the CBN is to mop up excess system liquidity, ramp up OMO sales at attractive rates and eliminate FX market inefficiencies.

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There has been an accretion in FX inflows, foreign reserves grew to $34.11 billion, supported by improvement in crude oil output and quick wins from ongoing FX reforms. The CBN said foreign investors are returning to the market as confidence in Nigeria’s economy improves. Its recently concluded Treasury bills auction attracted $1.0 billion from foreign investors.

The ongoing return of foreign inflows and Nigeria’s plans to tap the Eurobond market provide some comfort for FX liquidity in the near term. However, analysts noted that the apex bank is using higher rates to attract portfolio investors, and this is expected to raise borrowing costs. 

“… We perceive that the CBN might want to avoid the 2018 & 2019 scenarios, where about N3.0 trillion was spent on OMO interest payments”, CardinalStone said in a February market update.

The firm noted that this might have led to the collaboration with the fiscal authorities, which resulted in an unprecedented Treasury bill issuance of N1.0 trillion with a 1-year effective yield of 23.4%.

The CBN has cleared most FX backlogs, leaving a balance of about $1.6 billion, which it has promised to clear imminently. There was also an agreement to domicile a significant portion of the revenue of the National Petroleum Company Limited with the CBN.

To boost FX liquidity and promote a market-determined exchange rate, the CBN also removed the cap on the spread of interbank foreign exchange transactions rate and discontinued any restrictions on the sale of interbank proceeds.

All in, given the 23.4% implied yield on the 1-year instrument at the auction and its consequent positive impact on Nigeria’s carry trade, analysts at CardinalStone said they think that foreign investors’ return to Nigeria might be sooner than earlier expected.

The country witnessed a significant surge in foreign exchange (FX) inflows as overseas remittances more than doubled in February 2024. MarketForces Africa reported that FX inflows rose to $2.3 billion, driven by substantial remittance payments by Nigerians abroad.

The surge in remittances contributed to an increase in dollar inflow and purchases of naira assets by foreign portfolio investors. February’s overseas remittances reached $1.3 billion, a more than fourfold increase compared to the previous month. #Nigeria Offers Higher Rates to Attract Hot Monies #Anti-Homosexuality: Uganda Faces Difficulties Accessing External Funding –Fitch

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