Foreign investors are resisting the lure of rising interest rates to pile into Nigerian assets.
The uncertainty of a soft exit due to an acute shortage of dollars remains the elephant in the room for investors who spoke to BusinessDay.
After the benchmark interest rate was raised to 14% by the Central Bank of Nigeria (CBN) in July 2022, the yield on Nigerian treasury bills rose from around 3% to 7% in less than two months.
“Rising interest rates are a step in the right direction to address the problem of negative real interest rates, but there’s still a long way to go,” a South Africa-based fund manager told BusinessDay. .
“I imagine, however, that the shortage of foreign exchange is a bigger problem for foreign investors,” said the fund manager who left Nigeria last year.
The CBN raised rates for the first time in May, but this was not reflected in the inflow of foreign portfolio investment in the second quarter. Foreign portfolio inflows fell 20.9% to $757 million, according to data from the National Bureau of Statistics (NBS).
Foreign inflows, as reported by the Nigerian Exchange Group, also fell by 79.5% to 13.7 billion naira in July 2022 from 24.6 billion naira the previous month, the lowest since January 2022. this year, when they were 18 billion naira.
“The decline in foreign inflows is the result of a loss of confidence in the Nigerian foreign exchange market due to continued illiquidity,” said Tajudeen Ibrahim, head of research at ChapelHill Denham.
“Until the currency uncertainty subsides, investors will generally remain cautious in their exposure to the Nigerian market,” Ibrahim said.
Nigeria’s foreign exchange reserves fell 40.8% to $38.4 billion in September 2022 from a peak of $64.9 billion in August 2008, as shown by data on foreign reserves from Nigeria. CBN.
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This is partly due to falling oil revenues, on which Africa’s largest oil producer is overly dependent as a source of foreign exchange.
Nigeria’s oil production fell 11.47% year-on-year in the second quarter of 2021 (Q2’21). The decline shows a significant underproduction compared to the quota.
In its Monthly Petroleum Market Report (MOMR) for July 2021, obtained by BusinessDay, the Organization of the Petroleum Exporting Countries revealed that, on average, the country produced 1.343 million barrels per day (mbd) in Q2’21. , compared to 1.517 mbpd produced in Q2’20. This also compares negatively to OPEC’s quota of 1.4 mbpd.
Specifically, the country produced 1.28 mbpd, 1.23 mbpd and 1.23 mbpd in April, May and June 2022, respectively, compared to 1.372 mbpd, 1.344 mbpd and 1.313 mbpd produced in the corresponding months of 2021. This is compared to an average oil production of 2.5 million bpd in 2011.
Oil prices averaged $107 a barrel in the first half of 2022, the highest since 2011, but Nigeria was unable to benefit from higher oil prices due to low production.
According to Ibrahim, currency problems will ease in the second half of next year.
“The Dangote refinery is expected to save the country as much as it can regarding the foreign exchange challenges it is facing,” Ibrahim said.
At a recent meeting of foreign investors in New York, CBN Governor Godwin Emefiele said Nigeria’s imports of petroleum products, which accounted for 30% of its foreign exchange, could be reversed by the successful start operations at the Dangote refinery.
The Governor said that “the Dangote refinery, once it begins production, would be a major source of foreign exchange savings for Nigeria”, He added that “if the 650,000 barrels daily which will be produced from of the refinery were sold in naira, this would be a major foreign exchange saver for Nigeria.
However, Bismarck Rewane, CEO of Financial Derivatives Company, is not so optimistic. He said whatever Nigeria gains by not using dollars to buy refined gasoline is almost equivalent to what it will lose by dumping 650,000 barrels of crude a day that it can no longer sell and earn. dollars.
“The fact that the Dangote refinery could be a silver bullet to solve Nigeria’s foreign exchange problem is a misunderstanding of the facts. It will help reduce refining costs, it will help reduce transportation costs, but it’s the oil you’re going to export that’s going to get you a dollar,” Rewane said.