Foreign investors are still expressing pessimism over the ability of the Naira to rebound from its current slump, writes Paul Wallace of Bloomberg. According to Brett Rowley, M.D TCW Group, some foreign investors still prefer to watch on the sidelines and monitor future trends of the Naira as well as other related circumstances such as oil production.
According to Rowley, ‘the combination of the weakened Naira and higher yields on paper are tempting’, but there are still fears over the ability of the Naira to strengthen in the future. These fears are based on three main factors.
First, investors are not sure the Naira will still rebound quickly. The Nigerian Naira has lost almost half of its value against the dollar since 2014 when oil prices started dwindling, making it the worst hit currency among the major oil currencies. In a normal situation, the weakened Naira should attract foreign investors with the hope of higher returns as the Naira stabilizes.
However, some foreign investors remain wary, suggesting that the Naira may not actually have hit its worst and may plunge even lower, thereby posing a risk to the investors.
Bloomberg quotes Access Bank Plc as expecting the Naira to further weaken to 396 to a dollar by 2016 end and an incredible 515 to a dollar by second quarter 2017. These forecasts do little to allay the fears of investors.
A second factor is that investors consider the country’s current challenges in oil production as another cause for concern. The country slumped to its lowest oil production period in 30 years of about 1.5 million barrels daily. ‘Restoring oil output would help assuage our concerns’ Rowley expressed. Militancy and violent outbreaks in the Niger-Delta oil producing area has consistently lowered the country’s output, which is distressing for a country whose economy is currently driven by oil revenue.
A third reason for the pessimistic outlook is the lack of confidence investors have that the Naira truly floats. Discrepancies in values on the official rate and black market have led investors to decide that, as Andrew Howell states, ‘you can’t really call it a normally functioning exchange yet’.
A ray of hope, however, still exists as investors continue to monitor the situation and as Stephen Bailey, a senior economist at Global Evolution Fonds, Denmark, says, investors are closely monitoring the situation and are closer than ever to taking a risk and investing on the Naira.
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Parts of this article originally appeared in Bloomberg