Two Months After Devaluation Foreign Investors Are Buying Naira Assets Again

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 naira has depreciated 37 per cent against the dollar since the central bank abandoned its peg on June 20, while bond yields have jumped to more than 20 per cent. The naira strengthened 4.6 per cent to N315 per dollar on Tuesday after falling to a record N350.25 on August 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 N325 per dollar, the naira is too weak” and Landesbank anticipates a rebound, he said.
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.
Central Bank of Nigeria (CBN) governor,Godwin Emefiele fixed the currency in February 2015 at N197-N199 per dollar to stop it plunging amid the decline in the price of oil, on which Nigeria depends for 90 per cent 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 per cent for Kazakhstan’s tenge and 35 per cent for the Colombian peso.
That makes it a good time to buy Nigerian one-year Treasury bills with yields of about 22 per cent, Stuart Culverhouse, chief economist at Exotix in London, wrote in an August 9 note. The potential return is more than 33 per cent if the naira strengthens to its fair value of 290 against the greenback, he said. In April, one-year T-bills yielded just 10 per cent.
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 N396 by year-end and N515 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 N357 to the dollar, and one-year contracts at N394. The median forecast of economists in a Bloomberg survey is for the currency to stabilize at N344 this year.
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 per cent in dollar terms this quarter, through yesterday, compared with the three per cent 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 per cent.
“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 per cent and hedge the foreign exchange 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.”
There are however some that prefer remaining of the sidelines. “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 August 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 N309 last week and may be trying to keep the rate stronger than N320, according to Craig Thompson of Continental Capital Markets SA, based in Nyon, Switzerland. The naira trades at N395 on the black market, 20 per cent 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.”

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