Investors Snub Nigeria’s Bond Auction To Take Positions In Relatively Liquid Secondary Market

by Ike Obudulu Posted on August 25th, 2017

Abuja, Nigeria. Nigeria’s Debt Management Office (DMO) offered 135 billion naira worth of bonds maturing in 2021, 2027 and 2037, but investors scooped up 56.05 billion naira ($179 million) in a bond auction on Wednesday, less than half the amount on offer as domestic pension funds and insurance firms cut orders due to low yields.

A breakdown of the auction results revealed that the DMO sold N9.18 billion worth maturing in five years, N17.51 billion maturing in 10 years and N29.36 billion maturing in 20 years.

The debt office paid 16.80 percent for the 2021 and 2027 bonds and 16.90 percent for the 2037 debt.

According to auction results, investors demanded yields as high as 17 percent to help boost returns further above inflation, which was 16.1 percent in June.

How to Use Bonds to Predict the Economy

Bonds’ powerful relationship to the economy means you can use them for forecasting. That’s because bond yields tell you what investors think the economy will do. Normally, the yields on long-term notes are higher, because investors require more return in exchange for tying up their money for a longer time. In this case, the yield curve slopes up when looked at from left to right.

An inverted yield curve tells you that the economy is about to go into recession. That’s when the yields on short-duration bills, like the one-month, six-month or one-year notes, are higher than the yields on long-term ones like 10-year or 30-year Treasury bonds. That tells you that short-term investors demand a higher interest rate, and more return on their investment, than long-term investors.

Why? Because they believe a recession will happen sooner rather than later or in the case of Nigeria, that the recession is not yet over.

Meanwhile the Naira remained unchanged against Dollar, Pound, Euro

The implementation of the Investors’ and Exporters’ Foreign Exchange (FX) Window continues to ensure relative stability in the foreign exchange market. Companies and individuals are now able to access more foreign exchange in the market than before to carry out eligible transactions and economic activities are gradually picking up.

The Central Bank of Nigeria (CBN) introduced the special window for investors, exporters and end-users of FX on April 21, 2017 as part of its efforts to deepen the FX market and accommodate all the FX obligations.

According to the CBN, the objective of the window is to increase liquidity in the FX market and ensure timely execution and settlement of eligible transactions. The eligible transactions in the window are: 1) Invisible transactions such as loan repayment, capital repatriation, management services fees, consultancy fees, software subscription, technology transfer agreements, personal home remittances and any other eligible invisible transactions. 2) Bills for Collection 3) Any other trade-related obligations (at the instance of the customers).

The CBN stipulates that the supply of foreign currency to the window shall be through portfolio investors, exporters, authorized dealers and other parties with foreign currency to exchange to Naira. The CBN is also a market participant in the window to promote liquidity and professional market conducts

Nigeria aims to lure investors after publishing Nafex rate for foreign exchange transactions. The move has aligned inter-bank rate with black-market trades. For now, this is as close as it gets to a devaluation in Nigeria.

Nigeria took a step to unify its multiple exchange rates by allowing banks to use a currency window for investors when quoting the naira rather than the official rate. The naira weakened on the interbank market. The change was made because banks have been trading with each other mainly via the Nafex market since its introduction.

FMDQ OTC Securities Exchange, the Lagos-based platform that oversees interbank trading, asked lenders to publish quotes reflecting trades in the Investors & Exporters Forex Window. The window was opened in late April in a bid to attract inflows to the dollar-starved nation.

The inter-bank rate weakened 14 percent to 366.04 per dollar as of 5:42 p.m. in Lagos, close to 367.08 for the so-called Nafex rate, the daily fixing published by FMDQ for the Investors & Exporters FX window. Naira three-month forward contracts based on the official rate rose as much as 1.3 percent to 342 against the greenback, the highest level on a closing basis since June 6.

Monetary policy officials unified some of their multiple exchange rates when they let currency dealers quote naira levels used in actual trades. They did it to entice back bond investors who fled in 2014 and 2015 as oil prices collapsed and the central bank tightened capital controls.


Photo: Bonds

Banks had been using a currency window for investors known as Nafex since April, but weren’t allowed to publish their trades. This month, the FMDQ OTC Securities Exchange, a Lagos-based platform that oversees naira transactions, asked banks to start quoting Nafex rates, effectively merging that market with the main interbank one.

The move immediately weakened the naira’s interbank price 14 percent to about 365 per dollar, knocking $6.5 billion off the stock market’s value. For foreign investors not already using Nafex, it made naira assets a lot cheaper. And even for those that were, it boosted transparency and allowed them to see live quotes on their screens for the first time.

Investors have long called for Nigeria to use a single exchange rate predominantly driven by market forces. For now, the country is keeping several exchange rates in place, but the spread between the black-market and interbank rate is negligible. Still, the central bank hasn’t abandoned the official rate of 305 per dollar, which it uses to provide cheap dollars for some government transactions as well as fuel importers. After the changes, the gap between this rate and the interbank market has never been wider.

The web of other rates continues to warp the market, keeping the naira artificially strong for pilgrims seeking dollars to travel to Mecca, small and medium businesses, or Nigerians who need to pay overseas school fees, to name a few.

Ideally, the central bank needs to move to a unified exchange system and let the currency levels settle at the point where there is a clearing up of the foreign currency backlog, but the central bank is constrained because of the need to supply cheaper dollars to fuel importers.

Moving to a unified exchange system would entail an official devaluation, which President Muhammadu Buhari, who returned to Nigeria from London on Aug. 19 after 153 days of sick leave, and central bank Governor Godwin Emefiele have long stood firm against. They say it would only accelerate inflation that’s at 16 percent. Early indications are that the government will keep the naira’s official value unchanged for now, with the 2018 budget to be based on an exchange rate of 305 per dollar.

Nigeria has faced dollar shortages since the price of oil, its main export, crashed in 2014 and the central bank responded by tightening capital controls. As the squeeze worsened, Nigeria opted for a system of multiple exchange rates rather than floating its currency like other crude producers such as Russia and Kazakhstan

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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