03 July 2015, Lagos – The move, meant to conserve foreign exchange, has dashed widely-held expectations of naira devaluation – the central reform that investors had been banking on. Since then 10-year bond yields have jumped 1 percentage point to almost 15 percent, stocks have fallen and the naira’s value is plunging in the parallel market, down about 7 percent from early-June levels.
A devaluation to restore the economy to competitiveness is a matter of time, fund managers still believe. In the meantime, they are unlikely to bring back cash they pulled out before the election. “It will take a combination of weaker currency and higher interest rates to get us back to Nigeria,” said Kieran Curtis, a bond fund manager at Standard Life Investments. “When we compare Nigeria to other oil exporters it hasn’t had enough of a currency adjustment.”
With oil exports providing 70 percent of budget revenues, Nigeria can certainly use a cheaper currency. Most had reckoned on a 10-15 percent devaluation at least and some such as Curtis estimate a 20-25 percent move is probably needed. Non-deliverable forwards (NDF), derivatives used to hedge against future exchange rate moves, reflect expectations of currency weakening: six-month NDFs price the naira at 225 per dollar, while a week ago the forward price was around 215.
“To me, (CBN bank measures) are doing more harm than good: you are putting off the inevitable and the reaction you are seeing on rates markets and the NDF shows that,” said Kevin Daly, a fund manager at Aberdeen Asset Management. “Effectively the bond market is starting to price in a much wider move on the currency.”
With oil revenues down and borrowing costs rising, the 2015 budget is already 3.2 percent smaller than last year’s. By early May, the government had already exhausted half its borrowing allowance for the year. Ten-year yields at almost 15 percent, 250 basis points above post-election lows, will raise borrowing costs for the government and the private sector.
“Ultimately (devaluation) will become more of a fiscal necessity than an external necessity. The longer they will take to do the adjustment, the bigger the adjustment would have to be,” said Antoon de Klerk, portfolio manager at Investec’s African Fixed Income Fund. And crucially for investment flows, Nigeria’s place in the GBI-EM local currency debt index looks increasingly precarious.