The total value of offshore investment in Nigeria’s fixed income instruments has been put at about $12 billion.
A breakdown of this figure, according to a report, showed that while about 30 per cent of the funds were invested in the treasury bills market, 15 per cent in FGN bond market, 10 per cent had been staked on open market operations (OMO) bills.
The report however pointed out that most significant position had been taken at the primary market, saying that in order to avoid driving prices down, there would be need for investors to wait for maturity in order to exit.
CSL Stockbrokers, a division of FCMB (UK) Limited stated this in a report titled: “Are Concerns about the Naira Founded?” obtained at the weekend.
It also argued that with average daily liquidity of about $30 million in the equities market, it would take months, if not years, for foreign investors to unwind their positions in the market, even as it declared that to force a devaluation of the naira, will require about 30 per cent fall in oil revenues.
The CSL report added: “Looking ahead, there are redemptions worth $4.3 billion in the third quarter of 2013 – not an impossible sum for the CBN to manage, in our view. A greater cause for concern over the next six months is the level of oil production. While the price of Bonny Light is holding up well at $103.54 versus its year-to-date average of $110.62, there are widespread and often conflicting reports of falling crude production in Nigeria.
“As a rough guide (there are numbers of possible permutations) we think it would take a fall in oil production to 1.7million barrels per day (mbpd) and a near total liquidation of foreign FGN bond and treasury bills holdings over the next three months to force a devaluation of the naira. Under these assumptions, reserves would fall to just below $32 billion.
“A series of events over the past several weeks has contributed to a growing state of unease about the naira. There are reports of waning oil production in Nigeria, there has been volatility in the oil price, and uncertainty about monetary policy in the US has seen a rout in US Treasuries, with knock-on effects to bond markets across the world. While these events have dented market confidence in the naira, we do not think they hail a change in policy.”
According to the report, the anticipated change in leadership at the CBN represents “a tail risk”.
It pointed out that under the present CBN Governor, Mallam Sanusi Lamido Sanusi, the central bank had been clear about its approach to exchange rate management, adding that there had been consistency between its statements and actions.
“Yet with little visibility on potential successors – much less on how they would manage the exchange rate – the possibility of a dramatic shift in policy exists. It is a well-known fact that the Finance Ministry would prefer a freely floating exchange rate; at various times, the International Monetary Fund has also advocated for a liberalisation of the exchange rate regime,” it declared.