CBN Seeks to Lure Portfolio Investors with Higher Yields

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Obinna Chima
Indications have emerged that the Central Bank of Nigeria (CBN) could be considering wooing foreign portfolio investors (FPIs) back into the fixed income market with higher yields.

The move is also expected to improve the country’s forex liquidity. Standard Bank revealed this in its latest report obtained at the weekend.

According to the report, should the recent adjustments to over-the-counter (OTC) futures and open market operations (OMO) yields occur, “the CBN seems to be considering attracting FPIs again.”

Last week, the FMDQ OTC futures prices were adjusted higher by an average of N9.81 on the short-end and N14.16 on the long-end of the curve.

According to the report, “such a big move typically connotes an imminent depreciation of the dollar/naira pair.”
While noting that although the NAFEX fix was inching higher gradually, it stated that the expectation was that the move higher may be signaled by the next CBN forex intervention rate at the investors and exporters’ forex market, “which will likely be above the 400 levels.”

Similarly, it pointed out that the closing OMO auction rates surged by an average of 467 basis points at last Thursday’s auction, with the 12-month paper closing at 10.10 per cent. That was the first time the rate reached double digits since April 2020.
“In our January African Markets Revealed report, we argued that Nigeria could suffer ongoing idiosyncratic factors, notably the persistent forex liquidity dearth of the past nine months.

“FPIs have largely absent from the Nigerian fixed income market over the better part of the last year due to varying factors such as forex illiquidity conditions, very low interest rates and the perceived overvaluation of the dollar/naira,” it explained.

This, it stated, was in sharp contrast to the seemingly overwhelming support FPIs have given to African peers like Egypt and Ghana during this period in part, due to improving global risk conditions, a convertible exchange rate and relatively higher yields.

FPI inflows to the investors and exporters’ forex market were $12.44 billion and $15.77 billion in 2018 and 2019 respectively.
“In 2020, the figure was a meagre $3.79bn, underscoring the significantly reduced liquidity in the FX market last year.

“Should the CBN decide to shun FPIs for a prolonged period, the FX liquidity gaps will remain apparent, particularly if the CBN continues to keep a tight leash on foreign reserves.
“This scenario will sure have an impact on the growth dynamics in the short term, which may well stall the expected economic recovery over the coming year.

“We estimate Nigeria’s current account deficit at about $14 billion in 2021,” it stated.
Furthermore, it revealed that at the January Monetary Policy Committee (MPC) meeting, the CBN was contemplating other sources to improve FX liquidity, noting that export proceeds and diaspora remittances were top of the list.

The CBN late last year amended its policy on diaspora remittances to allow recipients of the same to receive dollar, as opposed to previously where conversion to naira was done at a CBN predeterminto ed rate.

Total direct remittances rose to a high of $19 billion in 2019, but fell shy of $5 billion in the first nine months to September 2020.

“A sustained rise in international prices could prove supportive for foreign reserves accretion this year.
“The government could also be looking to the tap the Eurobond market this year, also providing some support. The government plans N2.34 ($6bn) in external borrowing, as per the 2021 budget.

“The recent surge in the OMO yields could support our bias for a further uptrend in local bond yields, largely based on market sentiment. “Domestic market participants and government over the coming months will likely remain embattled given the government’s desire for rates to remain lower for longer.

“Of course, the readiness of the CBN to keep monetising the government’s fiscal deficit could dull the uptrend over the coming months,” it stated.