Nigeria Investors Embraces Caution Amidst Market Turmoil
By Chibuike Osigwe
As inflation reached 20.52 percent in August, the Central Bank of Nigeria (CBN) followed through on its plan to raise interest rates for the third time this year, by 150 basis points to 15.5 percent, to keep inflation under control while also attempting to slow capital outflows. That didn’t stop the annual inflation rate from reaching 20.77 percent in September, setting the stage potentially for more rate increases.
The CBN’s decision is expected to result in higher interest rates on savings and deposits, higher borrowing costs, higher interest rates on Federal Government securities — bonds, treasury Bills — and, most importantly, slower inflation. In the post-Covid global economic environment spooked by Russia’s invasion of Ukraine, the hawkish interest-rate posture has been adopted in leading economies such as the United States, the United Kingdom, the European Union and many others, including emerging and frontier economies.
Monetary and fiscal policies have been further compounded by the fact of an election year in which more spending is likely to stoke even more inflation. Investors pricing in the political risk likely to stem from the elections have started selling off, leading to a general downward slide of the stock market index.
Domestic and foreign investor participation in the Nigerian equity market was muted in September, as local investors continued to shift away from equities and into fixed income instruments, capitalizing on the higher interest-rate environment. As a result, the Nigerian stock market fell by 1.63 percent during the month of September 2022 with a loss of over N1.48 trillion in the third quarter due to aggressive sell-offs by investors. However, on the whole, the Nigerian equity market has been positive this year, with a return of 14.77 percent from January to September 2022.
Yields on Federal Government bonds rose in response to the Central Bank’s interest rate hike. With the mopping up liquidity through a higher reserve ratio amid rising inflation, most investors have adopted more caution. At the last bond auction in September 2022, the yields on the 3-year, 10-year, and 15-year FGN Bonds increased to 13.5 percent (+1.0 percent), 13.85 percent (+0.35 percent), and 14.5 percent (+0.82 percent), respectively. Rates on Nigerian Treasury Bills (NTB) rose in September as well, with the 1 year NTB offering rallying to 12.0 percent — previously around 9 percent — at the month’s final auction.
Whilst the Federal Government Bonds remained steady, Nigerian dollar-bonds were in full swing. Investors reacted swiftly after Nigerian finance said the government was considering restructuring some of its debt.
Nigerian dollar-bonds maturing in 2047 were quoted just below 56 cents on the dollar by 2.55 p.m. in London, down from 58.37 cents on Tuesday, while debt maturing in 2049 and 2051 also declined. Six of its bonds are now in what’s typically considered distressed territory according to data by Bloomberg.
The dollar-bond Prices recovered some ground after the minister stressed that all bondholders’ money is safe.
“The government has appointed a consultant to assess how it can reprofile its debt and to stretch out the repayments to longer periods,” Finance Minister Zainab Ahmed said in an interview with Bloomberg TV.
The local currency weakened to a record low following the debt-revamp news. The naira traded marginally firmer on Thursday afternoon before weakening to a record low of 441.38 Naira per dollar on Friday at the I&E window and over 740 Naira at the parallel market. This represents a 4.47 percent decline year-to-date. Nigeria’s external reserve stood at $37.95 billion as of October 12th in a continuous decline as the CBN tries to maintain currency stability amidst the forex scarcity and the high demand for greenbacks.
Moving forward, investors anticipate that the CBN’s interest rate and other monetary policy decisions will have a significant impact on both the fixed income and equity markets in the fourth quarter. The CBN is also expected to base its monetary policy decisions on inflation figures, capital outflows, and currency market developments.