Nationwide protests were the focal point for Nigerian markets albeit from a foreign perspective as pricing of assets largely foreign vested debt instruments (Eurobonds and Open Market Operations (OMO) bills) appeared somewhat spooked by the apparent disgruntlement of her populace due to economic hardship. Despite efforts by the Central Bank to boost FX liquidity, the Nigerian Autonomous Foreign Exchange Market (NAFEM) traded as high as $/₦1,635 and closed at $/₦1,617.08. To further improve the flow of FX across markets, the CBN announced the re-introduction of the Retail Dutch Auction System (RDAS) effective 7th August 2024. Interbank Naira liquidity was sustained above average throughout the week and Open Repo (OPR) and Overnight Rate (O/N) closed the week at 25.61% and 26.06% respectively. Globally, risk assets were negatively affected by US recession fears at the end of the week as everything from cryptocurrencies to oil was aggressively sold off in the rushed cling to safety.
Tuesday recorded a no-sale OMO auction for the third consecutive time. There was no subscription for the 90-day benchmark paper and the 180-day benchmark recorded a subscription of ₦1 billion out of ₦25 billion; eventually, the offer ended without allotment. Although subscription was much better for the long-dated paper (₦85.50 billion subscribed vs ₦100 billion offered), the CBN deemed it best not to allot at all. Market participants have drawn several inferences from CBN’s decision not to sell, with some adducing that the core essence of an OMO at this juncture is to attract dollar flows which were not forthcoming, and others attributing the no-sale to the very high bid discounts (as high as 26.89%).
Last Tuesday, President Bola Tinubu directed the Nigerian National Petroleum Company (NNPC) to sell crude oil to Dangote Refinery in Naira. We believe that the motive behind this move is to stabilise the pump price of refined fuel and the exchange rate. In the long run, this move could be a game changer, reducing the country’s reliance on FX for a major necessity. Without any doubt, crude sales in Naira could lead to a more stable exchange rate and reduced inflation outlook. This could result in lower yields, and improved investor confidence based on reduced currency risk.
On Thursday, a sharp decline was observed in Nigerian Eurobonds following the commencement of the 10-day nationwide cost of living protests. This situation has made these securities the ‘worst performing in emerging and frontier markets’ thereby causing significant concerns amongst investors.
Turkey’s financial landscape has experienced a significant turnaround recently, driven by an impressive $30 billion injection into the market. This surge has revitalised the economy, boosting investor confidence and propelling market performance upward. Financial analysts attribute the buoyancy of the market to the substantial cash influx.
The investment has had a positive impact across various sectors, restoring faith among investors who were previously wary due to recent economic challenges. According to a recent report, the Turkish government’s proactive economic policies and efforts to attract foreign investment have been highly effective. Numerous companies have seen their stock prices rise, sparking widespread optimism.
Small and Medium-sized Enterprises (SMEs), which are the backbone of Turkey’s economy, are experiencing increased opportunities and more accessible credit conditions. In particular, the technology, manufacturing, and tourism industries have been major beneficiaries of financing. Experts predict sustained growth in these sectors as the broader market stabilises and expands.
We believe that, like Turkey, Nigeria can enjoy a boost to her economy through the implementation of proactive economic policies positioned to attract significant foreign investments. These include offering incentives, improving the ease of doing business, and ensuring political and economic stability. Focusing on key sectors such as technology, manufacturing, and tourism could drive economic growth. In addition, providing support to SMEs, which are vital to the economy, can stimulate broader economic activity.
Further, making credit more accessible to businesses, especially SMEs, can help spur growth and innovation. Financial institutions should be encouraged to offer favourable lending conditions. Transparency, regulatory reforms, and effective communication of economic strategies could help restore and build investor confidence, leading to increased investments and economic activity. By adopting these strategies, Nigeria can create a more robust and resilient economy capable of sustained growth and development.
In the near term, the secondary market for Nigerian bonds is likely to remain volatile. The continuation or resolution of protests will significantly influence market sentiment going forward. Effective governance measures must be adopted to address economic and political challenges that will assist in stabilising the market. On a broader scope, global economic conditions and investor sentiment towards emerging markets will play a role. If the government can implement effective reforms and restore stability, there is potential for a recovery in bond prices. However, prolonged instability could lead to further capital flight and increased borrowing costs, making it challenging to attract investments in the near term.
The outlook for Nigerian capital markets is inevitably bearish in tandem with the global off-risk stance further to signaled US recession risk. CBN is expected to issue OMOs soon as RDAS commencement improves FX supply. The decline in oil prices, however temporary is not positive for Nigeria’s economy. Yields are likely to remain elevated.
