Foreign investors are resisting the lure of higher interest rates to invest in Nigerian assets.
Uncertainty about a smooth exit due to the acute dollar shortage remains the elephant in the room for investors who spoke to BusinessDay.
After raising the base interest rate to 14 percent Central Bank of Nigeria (CBN) in July 2022, the yield on Nigeria’s T-bills rose to 7 percent from about 3 percent in less than two months.
“The interest rate hike is a step in the right direction in addressing the problem of negative real interest rates, but there is still some way to go,” a South African fund manager told BusinessDay.
“However, I believe the foreign exchange shortage is a bigger problem for foreign investors,” said the fund manager, who left Nigeria last year.
The CBN hiked rates for the first time in May, but this had no effect on foreign portfolio investment inflows in the second quarter. According to the National Bureau of Statistics (NBS), the inflow of the foreign portfolio decreased by 20.9 percent to 757 million dollars.
Foreign inflows also fell by 79.5 percent to 13.7 billion in July 2022 from 24.6 billion in the previous month, the lowest since January this year when it stood at 18 billion, according to the Nigerian Stock Exchange Group. news
“The decline in foreign inflows comes 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 the foreign exchange uncertainty dissipates, investors will generally remain cautious in their exposure to the Nigerian market,” Ibrahim said.
Nigeria’s foreign reserves fell 40.8 percent to $38.4 billion in September 2022 from a peak of $64.9 billion in August 2008, CBN reserves data showed.
This is partly due to declining oil revenues, on which Africa’s largest oil producer is overly dependent as a source of foreign exchange.
Nigeria’s oil production fell by 11.47 percent year-on-year in the second quarter of 2021 (Q2 2021). The decrease indicates significant underproduction compared to the quota.
In its July 2021 Monthly Oil Market Report (MOMR), obtained by BusinessDay, the Organization of the Petroleum Exporting Countries revealed that the country produced an average of 1.343 million barrels per day in the second quarter of 2021, compared with 1.517 million barrels per day mined in 2021. Q2’20. This is also negative compared to the OPEC quota of 1.4 million barrels per day.
Specifically, the country produced 1.28, 1.23 and 1.23 million barrels per day in April, May and June 2022, respectively, compared to 1.372, 1.344 and 1.313 million barrels per day produced in the corresponding months of 2021. average oil production of 2.5 million barrels per day in 2011.
Oil prices averaged $107 a barrel in the first half of 2022, the highest since 2011, but Nigeria failed to benefit from the oil price rally due to low production.
According to Ibrahim, currency problems will be eliminated in the second half of next year.
“There are expectations that the Dangote Refinery will save the country as much as possible from the foreign exchange challenges it is facing,” Ibrahim said.
At a recent meeting of foreign investors in New York, Godwin Emefile, the CBN governor, said Nigeria’s importation of petroleum products, which accounts for 30 percent of its foreign exchange, could be reversed as a result of the successful commissioning of the Dangote refinery.
The governor said that “the Dangote Refinery, once it starts production, will be a major source of foreign exchange savings for Nigeria”, adding that “if the 650,000 barrels per day that the refinery will produce were sold in Naira, it would the main FX screensaver for Nigeria.”
However, Bismarck Reuven, CEO of the derivatives company, is not so optimistic. He said whatever Nigeria will gain from not using dollars to buy refined petrol is almost equivalent to what it will lose by giving up 650,000 barrels of oil daily that it can no longer sell and earn dollars from.
“It is a misunderstanding of the facts that the Dangote refinery could be a silver bullet to solve Nigeria’s foreign exchange problem. It’s going to help lower refining costs, it’s going to help lower transportation costs, but it’s the oil that you’re going to export that’s going to give you the dollar,” Reuven said.