Bond investors stranded in Nigeria risk 100% loss

Foreign investors attracted into purchasing Nigerian debt that was paying interest of 13% a year ago are unable to move their cash out of the country, Bloomberg reported Friday.

Curiously, the rate that investors now earn for lending money to the Nigerian government by buying 12-month treasury bills has fallen to a 10-year low of 3.2%. Worse still, the naira has been devalued two times against the dollar this year, risking losses when the capital is repatriated.

With their cash trapped, funds have only few choices but to park in short-term debt. They are waiting for the Central Bank of Nigeria to restart forex sales that were suspended in March after lower oil prices dried up dollar supplies. The outbreak of the coronavirus pandemic has aggravated the situation.

“Some people are either stuck in the queue or they have now decided to reinvest some of the money. There’s no level of returns that can compensate you for that risk — because the risk you are carrying is a 100% loss,’ said Ayodele Salami, chief investment officer at Duet Group, which has an Africa focused fund with investments in Nigeria.

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Simon Kitchen, an analyst with EFG Hermes, said in a note to investors last week that Nigerian equities and bond holders might have as much as $2.5 billion trapped in the country.

The central bank is making efforts to hold the level of the naira stable without exhausting its foreign exchange reserves, currently around $35.6 billion to below $30 billion.

A nearly 16% fall in crude prices over the 12 months has shrunken Nigeria’s biggest source of foreign exchange earnings.

In 2015, the apex bank introduced capital controls and curbs on imports, when it pegged the local currency at between N197-N199 per dollar. The official rate of exchange was lowered to N379 last week from N360 in March and N307 last year.

“We’ve been investing across African markets for about 15 years. And in 15 years, Nigeria is the only place where twice in less than five years you have a lockdown or a complete freeze of the foreign-exchange market,’ Salami said.

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