“We are likely to add to local currency bonds once FX volatility declines, but the timing of that remains up in the air,” said Kevin Daly, a portfolio manager at London-based Abrdn Investments Ltd. “It will require a combination of factors such as further foreign portfolio flows, and more importantly some de-dollarization as the central bank can’t be the sole provider of FX liquidity for the market,” he said.
Since succeeding Muhammadu Buhari in late May 2023, Tinubu has instituted reforms to woo investors and boost dollar liquidity. They include scrapping costly fuel subsidies, replacing central bank governor Godwin Emefiele with ex-Citibank executive Olayemi Cardoso, who has pledged a return to orthodox central banking, clearing a foreign-exchange backlog, and overhauling the country’s exchange-rate policies — effectively devaluing the naira.
While the initial steps enthused investors, increased dollar flows and led to a rally in the naira, that’s since dissipated.
Tellimer Ltd. data shows investor inflows into the foreign-exchange market declined by almost a fifth in April to a daily average of $200 million from a month earlier and were at $180 million in the first three weeks of May. The naira has lost almost 67% of its value against the dollar since June and fuel subsidies have been reintroduced after a public backlash over rising food and fuel costs.
Other measures investors would like to see before they boost their investments is better returns.
“We have invested in Nigerian eurobonds, but not yet invested in the local currency bonds,” said Ayo Salami, chief investment officer at Emerging Markets Investment Management Ltd. “The local currency bonds are not yet attractive given that inflation at about 33.7% is still above the policy rate at 26.25%,” Salami said.
Another issue Nigeria needs to address is the repatriation of funds.
While Nigeria offers higher equity valuations and better yields, emerging and frontier market peers like South Africa, Egypt, Kenya, Turkey and Pakistan offer less repatriation risks and a more advanced policy course correction and higher credibility that policies will be sustained, Tellimer said.
“I think as long as we can be consistent and clear about policy direction, when it comes to monetary policy and the like, then I think you will see confidence return, then you will see liquidity return,” said Ladi Balogun, chief executive officer of Lagos-based FCMB Group. “That is when you will see international investors come back.”