Offshore Investments in Nigeria’s Fixed Income Market Hit $13.5bn
IMAGE: CBN »
The total value of offshore investors’ stake in Nigeria’s fixed income securities as at July 2014 has been put at $13.5 billion. This is largely made up of treasury bills held by the foreign investors.
CSL Stockbrokers Limited stated this in its latest report titled: “FX Rate – surviving 2014 and beyond.”
CSL explained that although the estimate of the total offshore positioning in Central Bank of Nigeria’s (CBN’s) and Federal Government of Nigeria (FGN) debt instruments was less than half the $28.9 billion figure cited in the Net International Investment Position (NIIP) statistics published by the CBN, it was consistent with the $11.6 billion reported by the media towards the end of last year.
“In our view, the NIIP figures are overstated because they do not encompass capital leaving the country. Meanwhile, we understand that the $11.6 billion figure cited in the press was obtained by working with the custodians which hold fixed income investments on behalf of foreign investors, and write the Certificates of Capital Importation (CCIs) required to enter and exit these investments.
“Assuming our estimates approximate closely to the truth, could a reversal of portfolio inflows compromise the naira’s peg, as most investors seem to assume it would? If the global financial crisis of 2008-09 is representative of how investors would behave in the event of a reversal, then we could expect a 30 per cent reduction in offshore holdings,” the firm said.
For Nigeria, the report pointed out that the development translates into outflows of $4 billion or about one tenth or current forex reserves.
This, it also noted, would certainly create some volatility, but would not be sufficient to force a devaluation.
“It is possible that actual outflows would be greater than $4 billion. Indeed, some argue that hedge funds and other similarly fast forms of money account for the majority of offshore holdings, while the stickier ‘real money’ investors are a minority.
“Yet even in the extreme scenario, if the offshore positioning were cut by 50 per cent, this would still only require $6.7 billion of reserves. From the CBN’s perspective, we think this is a large but still manageable cost to pay for maintaining the peg,” it also stated.
According to data from the IMF’s Sovereign Investor Base Dataset for Emerging Markets (EM), shows that over half of the total offshore holdings of EM were acquired after 2010, the majority of this coming from asset managers (as opposed to governments or banks). By their estimates, foreigner investors now own 24 per cent of the average EM sovereign debt market.
The period of rapid accumulation of EM debt since the end of the global financial crisis was characterised by flows that were almost always positive (on a monthly basis) and seldom differentiated between countries.
This was both the result of unconventional monetary policies in the developed world, and the apparent improvement in EM sovereign balance sheets.
Over the course of this period, several countries including Poland, South Africa, and Lithuania received inflows equivalent to more than 10 per cent of their Gross Domestic Product (GDP).
Article Credit: Thisdaylive