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Foreign participation in debt market drops to 13.7%

By on February 5, 2015

Foreign participation in Nigerian fixed income securities market has almost halved to about 13.7 per cent, from its peak in 2013, Standard Chartered Bank revealed in its latest report titled: “Sub-Saharan Africa rates 2015 − Battling a bearish FX bias,” obtained by THISDAY.

Foreign investors’ holdings of Nigerian bonds had swelled nearly fivefold to an estimated $5.4 billion in 2013 after the country’s inclusion in a benchmark, JP Morgan Government Bond Index-Emerging Markets (GBI-EM) in 2012.

The decline in the participation of foreigners in the debt market was largely attributed to the decline in crude oil prices and the depreciation of the nation’s currency.

The sharp oil price decline had precipitated large portfolio outflows, and analysts at Standard Chartered Bank do not see a reversal of the trend in the short-term.

However, it argued that a further foreign-led sell-off in the debt market (and equities) looks less probable, saying foreign investors in the market “are already largely underweight local assets and are unlikely to fully liquidate their GBI-EM positions.”

The report noted that exiting market positions is also complicated by lower forex liquidity relative to 2014.

“Concerns about the exchange rate outlook, lower FX liquidity, and weaker external and fiscal fundamentals will likely deter capital inflows for some time.

“Should the oil price bottom out and recover modestly later in 2015, and dollar-naira firm up at a higher level, foreign investors may add to their naira positions and lock in attractive yields.

“Key risks to positions in Nigerian treasury bills and bonds arise from the weak oil price and the sustainability of current exchange-rate levels,” it stated.

Furthermore, the report noted that with banks’ forex trading position having reverted to 0.5 per cent of shareholders’ funds, forex liquidity may improve enough for Nigeria not to be excluded from the GBI-EM index in a few months.

“Yet this concern is likely to persist; this, coupled with the possibility of other upcoming forex restrictions and a weak naira  will probably discourage foreign inflows for now.

“We also think that foreign investors are more likely to resume long positions in Nigerian T-bills and bonds as the exchange rate weakens to a more sustainable level,” it added.

However,  it stated that onshore investors based in the country probably have more incentive to start accumulating at the long end, as bond rates above 15 per cent are close to historical highs.

It anticipated that local-currency returns on naira bonds would exceed 22 per cent this year − the third-highest return in Africa.

“Besides, local pension funds do not have to mark to market, which reduces unexpected duration-related risks even amid bearish external and domestic fundamentals.

“Nigeria’s interbank rates experienced a short-lived spike in December after an increase in the cash reserve requirement on private-sector deposits (to 20 per cent from 15per cent) on 25 November, but have since reverted to the previous trend on ample liquidity,” it added.

 

[ThisDay]