Nigeria: COVID-19 - Outlook for Foreign Investments in Treasury Bills Dims

30 March 2020

The uncertainty and general decline in global economic activities caused by the Coronavirus, COVID-19, pandemic as well as the sharp drop in the price of crude oil have further dimmed Nigeria's prospect of reversing the downward trend in foreign portfolio investments (FPIs) in the Nigerian Treasury Bills (NTBs).

FPI in NTBs represents the second biggest source of dollar inflow into the country after crude oil. It is also the biggest source of Capital Importation (foreign investment) into the country in 2018 and 2019.

Data from the Nigeria Bureau of Statistics, NBS, showed that FPIs purchased $13.5 billion worth of NTBs in 2019, which represents 56 percent of the $23.99 billion total capital importation (foreign investment) into the country during the year.

While FPI inflows into NTBs rose Year-on-Year (YoY) by 59 percent to $13.5 billion in 2019 from $8.47 billion in 2018, Financial Vanguard inquests, however showed a steady quarter-on-quarter decline from first quarter of 2019 (Q1'19) through fourth quarter of the year (Q4'19).

From a peak of $5.88 billion in Q1'19, FPI patronage of NTBs fell by 39 percent, QoQ, to $3.53 billion in Q2'19. It fell again by 28 percent, QoQ, to $2.54 billion in Q3'2019, and further by 42 percent, QoQ, to $1.48 billion in Q4'19.

Consequently, FPI patronage of NTBs fell by 75 percent or $4.4 billion in nine months from March 31 to December 31, 2019.

Factors driving the decline

This development was largely induced by factors including weakening global economic fundamentals, drop in crude oil price below budget benchmark, as well as the decline in interest rate on the NTBs in 2019.

Financial Vanguard analysis showed that average stop rate for 91-Days, 182-Days and 364-Days NTBs dropped by 800 basis points (bpts) in 2019. The stop rate for 91 Days NTB fell by 690 bpts to four percent at the end of December 2019 from 10.9 percent at the end of December 2018. The stop rate for 182-Days NTB also dropped by 810 bpts to five percent from 13.1 percent. The stop rate for 364-Days NTB fell by 900 bpts to 5.5 percent from 14.45 percent within the one year period.

This sharp decline in FPI patronage of NTBs was in spite of efforts by the CBN to use high returns on OMO NTBs to rekindle FPI interest in the nation's fixed income market.

In October, the apex bank, in a bid to rekindle foreign investment in NTBs, banned local investors from OMO NTBs, limiting patronage to banks and FPIs. This led to crash in yields on Nigeria Treasury Bills (NTBs). Yield on 364-Day NTBs dropped to 5.5 percent from 14.45 percent. But yield on 364-Day OMO NTBs remained above 13 percent, a deliberate strategy to sustain FPI patronage.

Notwithstanding this strategy FPI investment in NTBs recorded the biggest QoQ decline of 42 percent in Q4'19.

In addition to this was the steady decline in the nation's external reserves in the second half of 2019. From a peak of $45.175 billion on June 10, the reserves dropped by 14.6 percent or $6.58 billion to $38.595 billion at the end of December 31st.

The implication of this development was a double adverse effect. While the FPIs was nose-diving, the foreign exchange inflow followed in that direction, creating instability in the nation's external sector.

These situations are now compounded by the COVID-19 fallout which depressed Nigeria's foreign exchange revenue inflow while escalating the pressure on foreign reserves.

As at last week the oil price had dropped over 60 percent below the government's 2020 budget benchmark of $57 per barrel (pb) forcing a downward review of the benchmark.

Bleak outlook

Analysts who spoke to Financial Vanguard opined that the QoQ decline will likely worsen in the first quarter of this year (Q1'20) due to the ravaging effect of the COVID-19 pandemic on the global economy especially sharp drop in the price of crude oil, which accounts for 90 percent of the nation's dollar earnings.

They noted that while the chaos occasioned by the pandemic has triggered a general flight to safety among global investors, resulting to massive capital outflows from emerging markets, including Nigeria, the 65 percent decline in the price of Nigeria's Bonny Light Crude to $21.84 pb last week per barrel from $62.64 pb on February 20, has deflated investors' confidence in Nigeria, hence low appetite for the nation's TBs.

"Based on trading activities to date this quarter, we expect the Q1'20 report when published to show a significant decline in inflows from portfolio investments", said Chinwe Egwim, Macroeconomic analyst with FBNQuest Merchant Bank.

Corroborating this projection, Ayodeji Ebo, Chief Executive Officer, Afrinvest Securities Limited, said, "In the short-term, the prospect for higher FPI inflows is weak".

Explaining how the COVID-19 pandemic has impacted FPI flows in recent times, Saheed Bashir, Head of Research, Meristem Securities, said: "The widespread outbreak of COVID-19 has worsened the inherent fragilities in Nigeria's economy and as such, increased the rate of capital flight from the economy; monthly FPI inflows have dropped by more than 80 percent to just $0.21billion in March.

"Although the CBN has tried to offer attractive rates to foreign investors via the OMO market, this has not provided any respite, as investors have elected to move their funds to safe havens. This same trend is observable across emerging markets which have seen estimated capital flow reversals of $80bn in the past 60 days.

"As long as the oil crisis persists and the country's balance of payment continues to worsen, there is very little that can be done in the short term to attract foreign investors into the country, other than offering much higher risk adjusted returns to these investors."

Lukman Otunuga, analysts with FXTM, also explained: "The Coronavirus outbreak has created utter chaos across financial markets with appetite for riskier assets diminishing as global recession fears mount.

"It will be challenging for Nigeria to rekindle FPI interest in such unfavourable global macroeconomic conditions as pandemic fears accelerate the flight to safety. According to the Nigerian Stock Exchange (NSE), Foreign portfolio transactions now stand at a ratio of 73 percent outlows to 27 percent inflow. This suggests that international investors are hesitant to purchase Nigerian assets amid severely depressed oil prices, shaky economic conditions in China and darkening global outlook. Negativity across global markets is not only impacting Nigeria but other emerging markets; however the country's heavy exposure to oil and China will result in extra pain."

Speaking on policy measures needed to reverse the declining FPI interest in the nation's TB, Ayodeji Ebo said: "Implementing overdue reforms such as improving the ease of doing business, entrenching fiscal discipline, adopting a flexible exchange rate policy and removing price controls in the energy sector are positive signals that could restore the confidence of investors post Covid-19"

On her part, Razia Khan stressed the need to sustain an environment that is conducive for FPI flows.

Khan, who is the Standard Chartered Bank's Managing Director/Chief Economic, Africa and Middle East, Global Research said: "While Nigeria may not expect to be the beneficiary of large portfolio inflows in this uncertain environment, it is meaningful that a conducive environment to portfolio inflows is being kept in place, with efforts to ensure the ongoing convertibility of the naira. Should global risk sentiment eventually stabilise, Nigeria should still be able to rely on increased portfolio investment to help it weather weaker oil prices."

Also emphasising the role of the exchange rate in attracting FPIs, Chinwe Egwim said: "To attract FPIs with the current macroeconomic headwinds would be challenging. That said, to encourage inflows from FPIs, there has to be stability in the exchange rate."

Highlighting the foreign exchange measures required to revive FPI inflow to TBs, Saheed Bashir, said: "Maintaining strong investor confidence is a key determinant for attracting FPIs, thus, we opine that the CBN would need to harmonize its multiple exchange rate system and employ a free float policy which would provide investors with a fair valuation of the currency. This would enable the CBN pursue its focus towards price stability and free up foreign reserves which are fast depleting."

Lukman Otunuga, however, opined that the CBN may need to do more than amending its foreign exchange policy. "While lower rates in the circumstance could boost investor sentiment towards the Nigerian economy, the central bank may move ahead with other unconventional monetary policy tools such as tweaking the loan to deposit ratio. On the side of the equation, fiscal intervention in key sectors from the Federal Government may be needed to stimulate demand which accounts for over 70 percent of Gross Domestic Product (GDP)", he said.


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