Foreign investors are resisting the temptation to pile into Nigerian assets due to rising interest rates.
In a media chat with BusinessDay, some investors revealed that the uncertainty of a smooth exit due to a severe dollar shortage remains the elephant in the room.
Following the Central Bank of Nigeria’s (CBN) benchmark interest rate hike to 14 percent in July 2022, Nigeria’s Treasury bill yield has increased to 7 percent from around 3 percent in less than two months.
“The interest rate hike is a step in the right direction in solving the challenge of negative real interest rates but there’s still some way to go,” a fund manager based in South Africa told BusinessDay.
“I would imagine, however, that the foreign exchange shortage is a bigger problem for foreign investors,” the fund manager who exited Nigeria last year said.
The CBN raised rates for the first time in May, but the increase had no effect on foreign portfolio investment inflows in the second quarter. According to National Bureau of Statistics data, foreign portfolio inflows fell by 20.9 percent to $757 million (NBS).
“The decline in foreign inflows is as a result of a loss of confidence in the Nigerian foreign exchange market due to persistent illiquidity,” said Tajudeen Ibrahim, head of research at ChapelHill Denham.
“Until foreign exchange uncertainty disappears, investors will generally remain cautious in their exposure to the Nigerian market,” Ibrahim said.
Foreign inflows fell 79.5 percent to N13.7 billion in July 2022, from N24.6 billion the previous month, the lowest level since January of this year, Nigerian Exchange Group revealed.
According to the CBN’s foreign reserve data, Nigeria’s foreign reserves have fallen by 40.8 percent to $38.4 billion in September 2022 from a peak of $64.9 billion in August 2008.
This is due in part to declining oil revenue, on which Africa’s largest oil producer is overly reliant on foreign exchange.
In the second quarter of 2021 (Q2’21), Nigeria’s oil output fell 11.47 percent year on year. The decline indicates significant under-production in comparison to the quota.
The Organization of Petroleum Exporting Countries revealed in its July 2021 Monthly Oil Market Report (MOMR), obtained by BusinessDay, that the country produced 1.343 million barrels per day (mbpd) on average in Q2’21, compared to 1.517 mbpd in Q2’20. This also contrasts with OPEC’s quota of 1.4 mbpd.
In particular, the country produced 1.28mbpd, 1.23 mbpd, and 1.23 mbpd in April, May, and June 2022, compared to 1.372 mbpd, 1.344 mbpd, and 1.313 mbpd in the same months in 2021. In 2011, oil production averaged 2.5 million barrels per day.
Oil prices averaged $107 per barrel in the first half of 2022, the highest since 2011, but Nigeria has not reaped the benefits.
“There are expectations that the Dangote refinery will save the country as much as it can concerning the FX challenges it faces,” Ibrahim said.
At a recent foreign investors’ meeting in New York, Godwin Emefiele, the CBN governor, said Nigeria’s import of petroleum products that accounted for 30 percent of its foreign exchange could be reversed by the successful commencement of operations at the Dangote Refinery.
The governor said that “the Dangote Refinery, once it begins production, would be a major FX saving source for Nigeria,” He added that “if the 650,000 daily barrels that will be produced from the refinery were sold in naira, it would be a major FX saver for Nigeria.”
However, Bismarck Rewane, CEO of Financial Derivatives Company, is not as optimistic. He said whatever Nigeria gains in not using dollars to buy refined petrol is almost equivalent to what it will forfeit by giving up 650,000 barrels of crude daily that it can no longer sell and earn dollars from.
“That Dangote Refinery can be a silver bullet to solving Nigeria’s foreign exchange problem is a misunderstanding of the facts. It will help in reducing refining costs, it will help in reducing transportation costs, but it is the oil that you are going to export that will give you a dollar,” Rewane said.
