Early Concession Of Defeat By Jonathan, Peaceful Poll Diminish Investing Risks To Nigeria's Assets

 

The prevailing peaceful atmosphere after the presidential election is already yielding economic dividend as the naira displayed strong character against the dollar, occasioning a drop in the yields on fixed income instruments.

 

Despite initial anxiety about Nigeria’s political climate, early concession of defeat by outgoing President Goodluck Jonathan and the largely peaceful conduct of the elections appear to have diminished risks to investing in Nigerian assets.

 

The appreciation of the nation’s currency among others, portend that investors may have re-priced the socio-political stability faster than current fundamentals suggest, according to analysts.

 

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Currently, the naira has been appreciating at the parallel market, exchanging for between N190/192 to a dollar, while yields on the more liquid FGN bonds tightened last week by around 100basis points (bps), more than 125bps for the Jan 2022s. The Jul-2034 note, however, traded flat.

 

BusinessDay investigation shows that after significant sell-off when pre-election political risks heightened, the Bond, Treasury Bills (T-Bills), and Forex Markets turned bullish post-election.

 

Specifically, the bond market traded positive, as yields for most instruments (mostly at the shorter end of the curve) fell and average yield on T-Bills declined, while the naira strengthened against the greenback.

 

Yields across the bond market pared last week, as investors seemed to have renewed confidence in the Nigerian market on the back of a fairly seamless presidential election.

 

Also, yields on T-Bills show the 1month, 2month, 3month, 6month, 9month, and 12month pegged at 12.10% (-2.04%), 13.88% (-0.51%), 14.12% (-0.34%), 14.68% (-0.11%), 14.85% (-1.00%), and 15.35% (-1.28%) respectively.

 

However, analysts are of the opinion that Muhammadu Buhari, the president-elect, would come into office at a time when the nation’s buffers are at their lowest.

 

“We expect a viable sustenance in the recent trend going forward,” said analysts at Lagos-based investment house, Meristem Securities Limited.

 

These positive developments have increased the buy tendencies of international investors and domestic institutional buyers.

 

Analysts also believed that political risk played a prime role in shaping the capital market outlook. Currently, there are plans by the Debt Management Office (DMO) to raise N70billion bond by mid-April. Bond yield rose yesterday, as liquidity moderated.

 

“The long end of the curve has sold off in recent times, as market expectations continue to shift in the direction of the new macro realities in the market,” said investment analysts at Lagos-based United Capital plc.

 

“We expect a continued softer yield environment in the medium term, driven mainly by reduced political risk. However, the need for the CBN to maintain a tight monetary policy environment in the face of daunting macroeconomic challenges, will create a floor for yields in the 13.0%-13.5% range for the rest of the year”, the analysts added.

 

At the BDC, the naira exchanged for N200 against the greenback; while at the interbank, it stood at N199.

 

With political risks nearly completely out of sight, declining global crude oil prices remain the only substantial threat to the local currency.

 

But, the analysts believe that the incoming government has a herculean task ahead, as the macro picture remains gloomy amidst high expectations of a positive change.

 

They said the drop of the fiscal year 2015 expected budget oil price to $53 per barrel (/bl), from $77.5/bl in 2014, implied the Federal Government’s 2015 fiscal revenue would drop by one third.

 

They reasoned that the near-depleted excess crude account implies no access to savings to offset the decline in revenue.

 

“Current trend in the debt markets which was tending towards foreign borrowing, means less pressure on domestic debt markets could change under a new finance minister. However, should the current positive wave spill-over into international capital markets, recent yield compression could prove sustainable,” said investment analysts at ARM.