Paul Armstrong London
Nigeria is riven by an Islamist insurgency, political chaos and sliding oil prices. For a unit of Africa’s biggest insurer, the potential returns from its currency are still too good to resist.
Bryan Carter, who oversees almost $500 million (R5.8 billion) for Acadian Asset Management, is switching out of Nigerian bonds into forwards speculating on the naira’s future value. Record-high yields on the derivatives imply a 25 percent loss against the dollar over the next year. Carter said that was too much.
“There’s no reason to believe it would be that bad,” he said last week. “The perception of Nigeria in the markets has been really battered. But the currency depreciation is largely behind us. It’s a rare opportunity.”
Worst performer
The naira is already the worst performer among 24 African currencies over the past three months and is trading near a record-low. The continent’s largest economy has been hit by the halving in Brent crude prices since the middle of last year and attacks in the north of the country by Boko Haram militants. The postponement of presidential elections scheduled for this month further dented investor confidence.
Nigeria’s currency touched a record low of 206.32 naira (R11.9595) to the dollar on February 12 and was at 200.20 as of 9.42am yesterday in Lagos, after tumbling 13 percent in the past three months.
The “worst-case scenario” was that it would fall “maybe another 10 percent”, said Carter, whose firm specialises in so-called frontier markets.
The implied yield on naira 12-month non-deliverable forwards (NDF), which are more accessible to foreign investors because they’re traded offshore and exempt from local dealing restrictions, climbed to a record 39 percent the same day, before falling back to 35 percent.
Too bearish
The contracts suggest the naira will weaken to 267 a dollar in a year’s time, data shows.
Acadian, owned by Johannesburg-based Old Mutual, is not the only money manager snapping up naira forwards. Landesbank Berlin Investment agrees that markets are too bearish on Nigeria’s currency and started buying the derivatives early in February.
“Unfortunately, that was a little too soon,” Lutz Roehmeyer, who oversees $1.1bn for the Berlin-based investment arm of the German state-owned lender, said last week. “Now the rate is even more attractive. We’re completely shunning local government bonds.”
The trade isn’t without risks as capital flees Nigeria because of the economic and political turmoil. Foreign investors held 14 percent of naira-denominated government bonds in January, down from a high of 27 percent in 2013, Standard Chartered estimates.
Elections scheduled for February 14 were delayed by six weeks, with officials saying they needed more time to stop an Islamist insurgency that killed more than 1 600 people last month, according to UK risk consultancy Verisk Maplecroft. The International Monetary Fund cut its 2015 growth estimate for Nigeria to 4.8 percent on January 20 from 7.3 percent.
These factors make naira forwards too risky for Aberdeen Asset Management, though it can see the attraction.
“If you’re confident Nigeria can hold the line on the currency and it’s not going to blow out, then you should take a long-naira position in the NDF market,” Kevin Daly, who oversees $13bn of emerging market debt for Aberdeen in London, said last week. “That’s where you’re going to make the biggest bang for your buck.”
Rout
Nigeria has tried and failed to stem the rout in its currency. Earlier this month, the central bank scrapped the official rate for the naira, leaving only the market rate, which it hoped would be easier to defend from speculators.
It also introduced a new trading system, whereby dealers can only purchase dollars if they have matching orders from customers. Back in November, it raised interest rates to a record 13 percent.
In spite of these measures, the naira has tumbled and forward yields have surged to among the highest levels in the world for similar securities.
Even in fellow oil exporter Russia, where the rouble has slumped 28 percent in the past three months, one-year currency forwards have an implied yield of about 15 percent. That’s less than half the rate on naira NDFs.
For Acadian’s Carter, the potential returns are too good to pass up. He is even more certain about his investment since the presidential election was delayed. Nigeria had now bought itself time, he said, to take steps to support the exchange rate.
“It’s become even clearer since the postponement of the elections,” Carter said. “But the trade’s not attracting a lot of investors yet. It’s still a situation of extreme risk.” – Bloomberg