Naira-denominated investments are facing the double whammy of rising inflation and foreign exchange (FX) pressures, but some investors are still optimistic, according to analysts in the financial services industry.
Investments consist of federal government bonds, stocks, commercial papers, Nigerian treasury bills, and mutual funds, among others.
Last week, the Nigerian Exchange Limited All-Share Index rose 0.70%, its first weekly gain in three weeks, to 50,722.33 points, according to a report by Coronation Research.
FMDQ Securities Exchange Limited in January 2022 approved the admission of new commercial paper programs worth N40 billion to its platform.
“Investments in Naira currently face both currency and inflation risks. But many people and institutions still believe in the prospects of the Nigerian economy and therefore invest in Naira instruments,” said Ayodele Akinwunmi, Relationship Manager, Corporate Banking at FSDH Merchant Bank Limited.
He said a number of organizations, by regulation, would also continue to invest in naira-denominated instruments.
“To fix the naira, we will need to implement policies that will allow the country to earn foreign exchange from the following: exports of goods and services, foreign exchange inflows from foreign direct investments, foreign investment inflows, wallet, foreign remittances. Most of them will happen if we have an enabling environment that protects lives and properties,” Akinwunmi said.
On what to do to fix the naira, Bismarck Rewane, managing director of Financial Derivatives Company Limited, suggested increased dollar inflows as a short-term measure to deal with the naira crisis and the elimination of rates. multiple long-term exchange rates.
The August outlook for the money market or equities shows that investor sentiment will be driven by earnings performance, GDP growth, interest rate developments, dividend yields and equity-specific events , according to Rewane.
He said aggressive and speculative investors would stick to attractive dividend yields and that preservation of capital remains a priority for conservative investors.
“Gathering confined to less exchange rate, interest rate and politically sensitive sectors,” he said in his LBS breakfast presentation.
The Nigerian currency has been in freefall in recent weeks, losing 20.42% in seven months, as it peaked at 710 naira to the dollar last month from 565 naira at the start of the year on the commonly known parallel market. called black market.
At the Investors and Exporters (I&E) forex counter, an official market, the naira fell to a low of 431 naira to the dollar, losing 2.08% in the past seven months, from 422 naira on the first trading day of the year.
Nigeria’s external reserves, which give the Central Bank of Nigeria (CBN) the firepower to defend the naira, have fallen 3.83% in the past seven months from $40.50 billion at the start of the year to $38.95 billion as of August 8, 2022, CBN data said.
“The exchange rate is a major casualty of inflation,” Rewane said, adding that when the exchange rate is addressed, inflation will slow down and growth will increase.
Headline inflation in Nigeria hit a five-year high of 18.6% in June 2022 from 17.71% in May 2022. Economists have predicted the rate will reach 20% by the end of the year against a backdrop of rising food and energy costs.
The report noted that last week, trading in the secondary market in Nigeria’s Federal Government Bonds was bearish as liquidity in the system remained tight. As a result, the average benchmark bond yield rose 29 basis points to close at 12.25%.
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Across the curve, 7-year (+15 basis points to 11.90%) and 10-year (+45 basis points to 12.66%) bond yields rose, while the yield 3-year bonds (-1 basis point to 11.41%) fell.
“Our view remains that the combination of tight system liquidity and high federal government domestic borrowing will continue to drive yields higher over the coming months,” Coronation Research analysts said.
The Economist Intelligence Unit Limited, said Nigeria’s autonomous exchange rate peg rate is overvalued, at N416.4:1 USD (as quoted by the CBN) in mid-July, compared to an average parallel market rate of N:700 US. $1.
According to the EIU, the spread invites illicit arbitrage and is widening. In 2022-2024, foreign exchange reserves (on average 5.6 months of imports) should be sufficient to avoid speculative attacks, although one seems increasingly likely before the elections in early 2023.
He said in a report: “Exchange pressures will mount and a devaluation cannot be ruled out. Our baseline forecast is that a modest depreciation (4.2% per year on average) will be allowed over the period 2022-2024, and that the currency will end 2022 at 418.8 naira for 1 USD and at 445.7 naira for 1 USD by the end of 2024.
“The appreciation of the real effective exchange rate (REER) will intensify, as happened during the last commodity super cycle, in 2011-2014, leading to an increase in the import bill (especially services ). As oil prices decline, devaluations in 2025-26 should limit the depletion of foreign exchange reserves. This will only be a partial correction in terms of the REER, and the Naira will remain overvalued at 614.3 Naira to the USD at the end of 2025 and 666.5 Naira to the USD at the end of 2026.”