Naira float: Why foreign investors want higher interest rate on Nigerian treasury bills

Despite the recent managed float of the Naira which has seen the Naira maintain the N765 to N770 recently, foreign investors may still be on the sidelines unless rates on Nigerian treasury bills match inflation (Over 20%) returns.

This was disclosed by Wale Smith, a financial analyst during a conversation with Nairametrics on Saturday.

Other analysts, including Zeal Jacobson, stated that Nigeria and foreign investors with a view of investing in Nigeria must focus on Foreign Direct Investment.

Dollar inflow and bonds

Wale stated that Nigeria is not getting enough oil dollars, because of the recent backlog, adding that interest rates are low, as investors will not come here for 6-7%, not worth the risk.

“If dollar supply was being met, we won’t be here,
“I sense that what we need to do is fix dollar supply in the official rate because that is where the disparity is met so we need to address dollar needs of people who need to take a dollar out as it anchors on stability.

Increasing interest rate

Wale added that foreign investors, coming to invest in Nigeria to buy specific assets, have to buy something, adding:

“The easiest for them are treasury bills because they are risk-free before they move into stocks and other assets because you are not exposed to counterparty risks.
“In America you can get 5-6%, and it’s better to buy Nigerian Eurobonds without taking the risk of currency blowing against you, investors will also optimize,
“If the treasury rate is below 6%, it’s not worth it.

Eurobonds and Naira

He also added that Eurobonds leave foreign investors hedged against the dollar rate, and may not take a currency risk that is yielding lower,

“No reasons why Nigerian t-bills to be that low, because the CBN has set its rate as 18%, but t-bills at 7%, with the inflation rate at over 20%, so leaving t-bills at low rates does not work for anybody” he added.

He added that the monetary policy has to be credible, as it enables your locals to stop speculating against the currency, which means Nigeria needs to raise the returns at rate foreign investors find attractive,

He also warned that inflation is also high, due to the shocks, in fuel prices, once those shocks drop off, inflation comes down.

FDI

Meanwhile, Zeal Jacobson noted that Nigeria needs to focus on building the economy around FDI, as international investors are chasing hot money, and Nigeria has major issues that need to be addressed.

“Inflation won’t come down because you raised the inflation rate,
“Raising interest won’t increase manufacturing and employment, as it won’t mop up anything, we need to understand how this thing works, we need to sequence our solutions, with interest rate coming last.” He added.

What you should know

Recall Nairametrics reported this week that The Central Bank of Nigeria disclosed that the recent monetary policy decision implemented is not a free float but a managed float.

In a recent interview with Bloomberg in Rabat, Morocco, Deputy Governor Kingsley Obiora revealed that the Central Bank of Nigeria clarified its recent monetary policy decision.
The deputy governor also expressed caution in determining whether the exchange rate of the naira to the dollar has reached its lowest point, suggesting that it may still be too early to make such a determination.

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