By Bashir Olanrewaju
There are no signs the low yields that have dominated investments in Nigerian bonds, treasury bills and savings deposits will end any time soon.
For pension funds and other fund managers forced to hold on to government debt, the squeeze can only get tighter, as latest indicators show.
With annual inflation at 14.9 percent in November, the highest in more than three years, even the highest bond yields of more than 7 percent in December are making negative returns in real terms. The yields had improved from an average of 3.5 percent in the previous month.
For a government intent on borrowing as much as 4.3 trillion naira through bonds and treasury bills sales, the low-interest regime is very favourable for filling the funding gap created by lower oil revenue.
Due to the domestic availability of cheaper funding sources, President Muhammadu Buhari’s government has no plans for foreign borrowing this year, Finance and Budget Minister Zainab Ahmed said on Tuesday.
“As long as the domestic capital markets are favorable in terms of rates, we won’t be going to the international markets,” Ahmed said in an online briefing on the 2021 budget. Nigeria will only go for foreign funding sources “if the conditions are right.”
For investors anxious to preserve their wealth by staying ahead of inflation and naira depreciation, it’s a losing game. While there aren’t many options, a few remain.
One obvious beneficiary of the current turn of events is the equities market. Investors seeking better returns in the wake of the downturn in the fixed-income segment, were largely responsible for a stocks rally that took a hold by August and ended the year as the world’s best performer, gaining more than 50 percent on the year.
The robust performance of the market seems set to continue this with an 0.30 percent gain in the first week of trading in 2021. Traders looking for attractive bargains are snapping up top performers among the banks, cement producers, telecommunications and manufacturing companies.
Pension funds, among the biggest buyers of Nigerian government bonds, are increasing their investments in stocks in line with the rule change in 2012 that allows them to have as much as 50 percent of their assets as stocks. At a time foreign investors are reticent to return to the market, Nigerian institutional and individual investors, appear set to continue driving the market.
How the market pans out through the year will be mostly dependent on the actions of the fiscal and monetary authorities in maintaining price stability and creating reforms necessary to end the current recession and restore economic growth. In other words, Buhari’s macroeconomic policies will spell the ultimate trajectory of Nigerian investments.
The government’s fiscal position remains vulnerable. Oil prices have only achieved modest gains, reaching the 50-dollar-per-barrel territory recently, but still subject to weak demand as coronavirus virus-induced lockdowns remain in place around the world.
For a mostly import-dependent country, a key factor is the state of the country’s foreign reserves.
The reserves were down to 35.37 billion dollars in December after shedding 40 million dollars, with chances of a rapid accretion not forthcoming. Over a period of seven months last year, the central bank spent 1.22 billion dollars of the reserves to defend the naira against pressures caused by demand for foreign-exchange.
The somewhat modest depletion was achieved partly by denying foreign portfolio investors seeking to exit the Nigeria market access to foreign exchange.
“A pipeline of delayed external payments has developed since late March, estimated at 3 billion,” FBNQuest, the investment-banking arm of First Bank, said in a recent advisory. “A good proportion of the pipeline consists of the repatriation proceeds of exiting foreign portfolio investors.”
This leaves the economy still subject to foreign-exchange vulnerabilities that might worsen inflation and further erode gains made in the stock market.
The current situation underscores the need to hedge against these weaknesses by making foreign-currency denominated investments. These will help make up for the losses that are inevitable as inflation and exchange-rate pressures take their toll on the economy in the months ahead.