Nigeria shows early resilience as investors pull funds from emerging markets

Some $5.6 billion has been peeled off emerging market equity and bond markets in the last two weeks of April, according to data from the Institute of International Finance, confirming fears that the rise in the 10-year U.S. bond yield to 3 percent and a resurgent dollar would trigger a sharp downturn in portfolio flows to emerging markets.
As markets like Argentina counted loses Friday, Nigeria seemed shielded from the storm, as data released on the same day by the National Bureau of Statistics (NBS) showed that foreign portfolio flows hit $4.56 billion in the three months through January to March 2018, the highest since the third quarter of 2014, before global oil prices halved amid a supply glut.
Foreign investor sentiment towards Nigeria is running high on the back of the oil price rally, which has improved dollar liquidity, boosted external reserves and helped take the economy of Africa’s largest oil producer out of its first recession in 25 years.
While the first quarter capital importation data showed that foreign portfolio investors are lapping up Nigerian assets less than a year to the elections, it fell short in giving a clear picture of whether the same investors are growing cold feet towards Nigeria due to the rally in US bond yields.
“We could also see Foreign Portfolio Investors (FPI) participation decline in the near term given the significant reduction in yields in the money market, with one year treasury yields falling as low as 13 percent so far in Q2 2018,” analysts at Lagos-based research firm, Investment One said Friday.
“This combined with the rising yields in the US economy and increasing geopolitical tensions could see foreign investors flee emerging and frontier markets like Nigeria,” Investment one said in a note to clients.
The Nigerian Stock Exchange (NSE) is yet to publish the foreign investment report for April, which would have provided clues into any exits by foreign portfolio investors in response to the US bond rally and stronger dollar.
In March, the NSE report showed net foreign inflows of N7.2 billion ($USD 23 million). That was a 9.7 percent increase from net flows of N6.56 billion in February, but a 57.9 percent decline compared to net flows of N17.11 billion only in January of 2018.
Any reversal in foreign capital importation could be a negative for turnover at the Investors and Exporters (I&E) foreign exchange window, given that FPI inflows accounted for close to 56 percent of total inflows in Q1 2018.
The naira weakened 0.1 percent to N361.05 on the I & E fx window Friday, according to FMDQ data.
Sam Ocheho, head of global markets at Stanbic IBTC, says demand pressure is building on the I & E window as portfolio investors repatriate dividends from the stock market and capital gains from fixed income where yields have crashed and prices have rallied.
“Some portfolio investors with maturities at the end of the year are likely to exit, to leverage the decline in government Treasury bill yields,” Ochecho said.
The yield on One-year government Treasury bills is currently a short crawl away from 10 percent, from as high as 22 percent last year, as yields tumble on the back of a supply cut back by the federal government to manage its rising debt service costs and free up credit to the private sector.
Portfolio exits could cause no more than an 8 percent depreciation in the naira exchange rate on the I & E window, according to Bismarck Rewane, who shared his views at a recent Standard and Poor’s conference Thursday in Lagos.
“The significant accretion to reserves should support the stability of the local currency at a ceiling of N390 at the I &E FX window and the parallel market,” Rewane said.
External reserves have shot up by about 85 percent since October 2016 to US$47billion at May 2018, according to central bank data.
While the bond rally could trigger an exit and cause the naira to weaken marginally, the oil rally throws some confusion into the mind of investors, as they are torn between exiting and staying back amid an oil rally that is net positive for Nigerian assets.
“The oil rally is throwing up a hell of confusion in the mind of foreign investors,” said Wale Okunrinboye, a fixed income expert.
“Investors may now prefer to ride out the election cycle by rotating from equities to safer fixed income assets, as exiting when oil prices are close to $80 per barrel could be interpreted as a weak hand strategy,” Okunrinboye said.
Brent crude traded at $77 per barrel Friday, almost double the price compared to 2016.

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