Foreign investors unable to repatriate funds face 100% loss on Nigeria’s investment
The persistent dollar shortage and the inability of the Central Bank of Nigeria (CBN) to sell dollars to foreign Portfolio Investors (FPI) who want to repatriate their funds back to their home countries is causing stress among fund managers.
The CBN governor, Godwin Emefiele had in June appealed to the FPI to be patient with the bank as it sorts out the challenges of dollar rationing in the wake of the fall in Nigeria’s foreign exchange earnings from crude oil exports.
“There’s no need for anybody to worry as long as you allow us to deal with this issue in an orderly fashion,” central bank Governor Godwin Emefiele said on June 24. “It’s a guarantee, you will get paid, but be patient.”
But it appears FPI patience is running low as they face losses on their investment as Nigeria devalued its currency, which has further eroded their investment and the value of their money.
The CBN has devalued the currency twice this year by 18.99 percent as it moved toward eliminating multiple exchange rates in the country and stablise the external accounts balance.
Goldman Sachs Group Inc in its outlook on Nigeria’s currency this week said a significant devaluation of the naira is likely in 12 to 18 months to stabilize Nigeria’s external accounts.
An exchange rate of 500-550 per dollar should bring about the desired balance, according to Goldman economists, compared with a current rate of about 407.
The implication of the devaluation of the local currency to FPi is that their funds trapped in the country will continue to lose value by the time dollar is available for them to move away their money out of the country.
Apart from those who had lock in on naira future fix rate, the rest are attempting to place their trapped funds in treasury bills and bonds which have also declined in value as surging liquidity and government attempt to slash borrowing cost pushed down yields across the board.
Average yields on Treasury bills that are sold at regular auctions have declined to 1.9 percent, near the lowest on record, while rates on central bank paper, otherwise known as OMOs, have declined to about 4 percent across the curve. OMOs used to trade in the high double digits
The economic fallout from the coronavirus pandemic has further exacerbated the pressure on the local currency as revenue from oil has dropped significantly while the dollar reserves have plummeted more than 20 percent from last year’s figure.
“Some people are either stuck in the queue or they have now decided to reinvest some of the money,” said Ayodele Salami, chief investment officer at Duet Group, which has an Africa focused fund with investments in Nigeria. “There’s no level of returns that can compensate you for that risk — because the risk you are carrying is a 100 percent loss.”
Holders of Nigerian bonds and equities may have as much as $2.5 billion trapped in the country, Simon Kitchen, an analyst with EFG Hermes, said in a note to investors last week.
The regulator introduced capital controls and restrictions on imports in 2015, when it pegged the naira at between 197-199 per dollar. The official exchange rate was lowered to 379 last week from 360 in March and 307 in 2019.
“We’ve been investing across African markets for about 15 years,” Salami of Duet Group said. “And in 15 years, Nigeria is the only place where twice in less than five years you have a lockdown or a complete freeze of the foreign exchange market.”
The spread between Nigeria’s yields and EM average yield has narrowed
The lower returns are not only hitting foreigners. Local pension funds that have more than 70 percent of their portfolios in government bonds are losing money when adjusted for inflation, which has averaged 11.8 percent in the past year.
“The value of pension assets will depreciate in real terms,” said Wale Olusi, head of research at United Capital Plc in Lagos. “This is very depressing for an economy with huge potential for investment in a wide range of sectors.”
-With Bloomberg report