Investors Switching into Forward Speculation on Naira – Thisday

Obinna Chima with agency report

More foreign investors are switching out of Nigerian bonds into forwards speculating on the naira’s future value, a report has stated.

For instance, Bloomberg cited the case of Bryan Carter, who oversees almost $500 million for Acadian Asset Management Incorporated who is also switching out of the Nigerian bonds into forwards speculating on the naira’s future value. Record-high yields on the derivatives imply a 25 per cent loss against the dollar over the next year. This Carter said is too much.

“There’s no reason to believe it would be that bad,” he told Bloomberg, adding that “the perception of Nigeria in the markets has been really battered. But the currency depreciation is largely behind us. It’s a rare opportunity.”

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. The naira closed at N198 to a dollar on the interbank market on Tuesday.

Nigeria’s currency touched an all-time low of N206.32 per dollar on February 12, 200.77 after tumbling 13 per cent in the past three months.

The “worst-case scenario” is that it will 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, 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 32 percent. The contracts suggest the naira will weaken to  N263 per dollar in a year’s time, data compiled by Bloomberg showed.

Acadian, owned by Johannesburg-based Old Mutual Plc, isn’t the only money manager snapping up naira forwards. Landesbank Berlin Investment GmbH agrees markets are too bearish on Nigeria’s currency and started buying the derivatives early February.

“Unfortunately, that was a little too soon,” Lutz Roehmeyer, who oversees $1.1 billion for the Berlin-based investment arm of the German state-owned lender, said. “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 per cent of naira-denominated government bonds in January, down from a high of 27 percent in 2013, Standard Chartered Plc estimated.

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 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 Jan. 20 from 7.3 percent.

These factors make naira forwards too risky for Aberdeen Asset Management Plc, 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 $13 billion of emerging-market debt for Aberdeen in London, said by phone on Feb. 16. “That’s where you’re going to make the biggest bang for your buck.”

The Central Bank of 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.