How confidence crisis delays return of foreign investors

Barely two months after the floating of Naira exchange rates, foreign investors are still battling with unsteady sentiments over the actual value of the local currency to make investment decisions.

However, those willing to stake the fortunes are now passing through subsidiaries of multilateral institutions than direct investment in local securities.

Meanwhile, international investment and banking group- Exotix Partners LLP and Standard Bank Group Limited are now calling on their clients that fled the country over capital controls issues to come back and start buying Naira assets again.

The Naira became the worst-performing currency among more than 150 globally as it depreciated 37 per cent against the dollar after the de-peg, while bond yields have jumped to more than 20 percent.

On Tuesday, the naira strengthened 4.6 percent to 315 per dollar after falling to a record 350.25 on August 19.

“The cheap naira is attracting foreign investors. At N325 per dollar, the Naira is too weak,”  a $12 billion money manager at Landesbank Berlin Investment,  Lutz Roehmeyer, said. But he said the company anticipates a rebound for the Naira.

Conversely, Roehmeyer’s funds have doubled their holdings of Naira debt in the country to the equivalent of $9.2 million this month, but not in government securities, rather on bonds issued by the World Bank’s International Finance Corporation.

While Landesbank Berlin and Exotix agreed that the currency has fallen enough, others are projecting further decline.

According to Bloomberg report, Access Bank Plc is expecting the Naira to weaken to N396 by the end of the year and N515 by June 2017.

Already, Forward prices is showing worse to come, as three-month non-deliverable forwards trade at N357 to the dollar, and one-year contracts at N394 are not assuring to investors. But a median forecast of economists is putting the currency at N344 this year.

“The combination of a cheaper Naira and higher yields on naira paper are tempting, but we remain comfortable on the sidelines. Restoring oil output would help assuage our concerns,” the Managing Director of Los Angeles-based TCW Group Inc., who oversees $195 billion of assets,  Brett Rowley, said.

Again, like a “tall order”, the Niger Delta militants are on the prowl, although reports said they are ready for talks with government. This cannot be counted fully until a deal is brokered.

A New York-based frontier-markets analyst at Citigroup Inc., the world’s biggest foreign-exchange trader, Andrew Howell, said: “The exchange rate is closer to fair value in the eyes of most investors. But there still aren’t many inflows. You can’t really call it a normally-functioning exchange rate yet.”

Nigerian local-currency bonds have so far lost 17 percent in dollar terms this quarter, compared with the three percent 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 percent, an indication of risk pricing.

“We haven’t come back into the local market yet, but we’re looking at it closely. If you can get a yield above 20 percent 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,” a trader said.