The Lagos stock market has climbed nearly a third in the past six weeks and trading volumes have more than doubled. Local bonds, some paying yields over 20 percent are also luring more foreign investors, local traders said
The new window has re-opened the doors to the carry trade in naira – one of the few such opportunities on the continent outside South Africa, said Yvette Babb, executive director for sub-Saharan Africa research and strategy at J.P Morgan.
Babb estimates foreign portfolio outflows from Nigeria were around $6 billion last year, but added:
“Depressed equity prices and high local currency yields in combination with the exchange rate adjustment is likely to give rise to further foreign portfolio inflows.”
But NAFEX still has plenty of critics. Above all, investors are worried by authorities’ failure to guarantee that the window will remain available in future, especially in the event of another sharp decline in oil prices.
Secondly, the central bank sold more than $4 billion from February to May to narrow the gap between the official and black market exchange rates. But with reserves of just over $30 billion, it is doubtful it can keep selling at such a pace.
“In the case of oil production coming down again, it is not clear that the currency will adjust and you could go back to a position where the market goes completely illiquid again,” Emso’s Weeks said.
And those betting that NAFEX heralds a swift and full-fledged naira liberalisation may be disappointed.
The government has pledged to end its reliance on oil product imports by 2019 – and the two are connected, Babb said.
“Markets are expecting more exchange rate liberalization in the next six months, but policymakers seem to be seeking convergence by 2019,” Babb added.
So more conservative investors are holding back. For instance Guy Tousso, portfolio manager for emerging markets fixed income at BNP Paribas Asset Management, is waiting for a functioning naira market to return but says it is inevitable.
“They are getting there, but it is a slow pace in Nigeria because the social impact will be negative. But I don’t think they have any choice.”