Bond investors are closer to pulling the trigger than they have been in more than a year on Nigeria’s local markets as the economy is beginning to reap the fruits of Central Bank’s decision to adopt a flexible exchange rate system.
Analysts and economists across boards have advised investors, who hitherto fled the country on the back of a capital control, to come back and buy the country’s Naira assets again.
It is generally accepted that a cheap currency attracts investors as bond yield rises and price falls.
For instance, during the Russian depression, as price of imports spiked and imports became expensive, people started selling currency and this move stoked inflation. The central bank had to raise rates to curb rising price and hence, yield rose and price fell.
In Switzerland, on the other hand, the central bank recently had to lower rates substantially, and then make them negative to discourage foreigners from buying Swiss Franc. The currency had been appreciating too much, introducing deflationary risks, yield fell and bond rose.
Nigerian local-currency bonds have returned 11.5 percent this quarter, compared with the 3 percent average return of 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.
The apex bank removed a currency peg on naira-N197-N199 and introduced a flexible exchange rate that saw the currency depreciate by 38 percent to between N280-N285. The Naira now trades between N308 and N345, according to FMDQ website.
Nairametrics believes that a lasting solution to the Militant attacks on oil facilities in oil producing Niger Delta region will lower the country’s risk premium and bolster investor’s confidence in the economy. As a result of such attacks, Nigeria has lost its position as the largest oil producer to Angola and is losing significant oil revenue.