The era of investors waiting for the Central Bank of Nigeria (CBN) to squeeze inflation out of the economy to get better returns on investment is over. After the CBN consistently missed six to nine per cent inflation target for seven years, investors are now rethinking their investment strategies and divesting to dollar assets which posted over 32 per cent returns this year. The 21.47 per cent inflation rate in November – 17-year high and 11th straight month of acceleration – has not only eroded interest income on savings but drastically cut treasury bills and bonds’ yields. The inflation uptick also opened new investment route in alternative assets dominated by dollar funds. Assistant Business Editor COLLINS NWEZE reports that although dollar funds offer higher protection against inflation-induced capital erosion and accelerate foreign capital inflows to the economy, allowing them to override naira assets will endanger exchange rate stability.
Armstrong Charles-Obi, a Nigerian resident in Canada, is one of the investors that have, for decades, prioritised diversified investment plan. He knows the dangers of putting one’s eggs in one basket, which is one of the first lessons investment managers teach greenhorns.
But in January this year, he took an unusual but decisive decision to elevate his returns on investment. Charles-Obi instructed his banks to liquidate his naira investments – fixed deposits – and convert the proceeds to dollars. His investments in equities were also liquidated with the proceeds converted to dollars. As a savvy investor, Charles-Obi had monitored with enthusiasm, the 20 per cent return on investment recorded by dollar funds in 2021, and decided to explore that opportunity.
“I noticed that many investors were scrambling for dollar assets, which returned average of 20 per cent in 2021, as against seven per cent returns by equities and savings. Not wanting to be left behind of this year’s largesse, I decided to put all my eggs in one basket: dollar assets,” he said.
Return on dollar assets has risen to an average of 32 per cent in November, 10.53 per cent premium above 21.47 per cent inflation rate. While Charles-Obi is counting his gains, Benson Adigun, a Lagos-based civil servant and equities investor, had less returns on investment to celebrate. Nigerian equities had closed 2021 with average return of 6.07 per cent, equivalent to net capital gains of N1. 27 trillion. As at November 30, average returns to investors at the Nigerian stock market stood at 12.73 per cent, equivalent to net capital gains of N2.84 trillion.
Despite the uptick in equities market performance, Adigun’s 12.73 per cent return is 8.74 per cent below 21.47 per cent inflation rate. “I know that my investments are not doing great, when placed side by side the double-digit inflation rate. But I am better off than those that placed their funds in current account, and absorbed the entire inflation heat. Still, there are pockets of value in the equity market, which are worth exploiting, and there are number of listed companies whose long-term internal returns on equity (RoE) suggest positive long-term total returns,” he added.
Chief Investment Officer, Afrinvest Asset Management Limited, Robert Omotunde, said although there are laws within the country that prevent dollarisation of the economy to avoid putting pressure on the local currency, for investors with dollar inflows, such investment is advisable. “It makes sense to take advantage of dollar investment opportunities for investors with dollar inflows. There are portfolios or opportunities that you can take in different asset classes. There is no over-emphasising the point that investors that are going to beat inflation, and get superlative return, need to consider diversification by currency, and United States dollar is a major currency diversification that we preach,” he said.
Dollar assets in perspective
Despite the prospect of good yields by Nigerian equities, many investors are scrambling for dollar funds offered by many investment companies. Afrinvest Asset Management Limited introduced to the investment market, an open-ended mutual dollar fund which pays as much as 7.5 per cent interest per annum. The fund provides a significantly higher return compared to funds kept in a domiciliary account in Nigeria or current bank account in Europe or America. The Afrinvest Dollar Fund was created to help investors achieve income generation, capital preservation and portfolio diversification in the short to medium term. It was designed to deliver significantly higher returns and dividend will be paid twice a year. Nigerians will be able to invest in the fund with as little as $ 1,000.
Stanbic IBTC Dollar Fund was inaugurated by Stanbic IBTC Asset Management to provide currency diversification, income generation and stable growth in US Dollar. In emailed note to investors, the investment company said it seeks to achieve this by investing a minimum of 70 per cent of the portfolio in high quality Eurobonds, maximum of 25 per cent in short term US Dollar deposits and a maximum of 10 per cent in US Dollar equities approved and registered by the Securities and Exchange Commission of Nigeria.
However, there are operational issues that limit local investors from entering the dollar funds space. For instance, foreign assets investment policy set requires that only dollar inflows from offshore accounts and not locally-sourced foreign currency can be invested in dollar asset. Head of Research at Coronation Asset Management Limited, Guy Czartoryski, said review of deposits in top 10 banks showed that 40 per cent of customers’ total savings, current and term deposits accounts are in dollars. He said high net-worth Nigerians now prefer to save their cash in dollars. “Many investment banks had floated dollar funds, giving depositors and savers opportunity to hedge against naira depreciation. High net-worth customers of banks now prefer to save their funds in dollars, with dollar deposits now 40 per cent of total banking sector deposits,” he stated.
He said the financial sector has also seen a rise in the number of customers liquidating their savings deposits, and moving the funds to Mutual Funds, where interest are now higher and risks lower. The Chief Business Officer, Optimus Investment, Ayodeji Ebo, agreed with Adigun on dangers of keeping idle funds. While encouraging more people to invest instead of keeping idle funds, Ebo noted the reality of inflation spike is that it reduces purchasing power of the people.
“Even if interest or the return you are getting on your investment is below inflation rate, doing nothing will make you worse off. By investing in equities, money market, treasury bills or dollar funds, you are likely to reduce the impact of inflation on your funds,” he stated.
Ebo explained that although inflation is running far ahead of returns, that should not deter investors’ commitment. “Assuming you earn between 10 to 20 per cent returns, it means you have been able to cut down your actual cost of living by at least 10 per cent. In real terms, your exposure to inflation is moderated by the extra income from investing, which is better than just taking inflation 100 per cent,” he added.
He said: “The options available are equity investment, treasury bills/commercial papers, federal government bonds/corporate bonds, federal government savings bond and dollar funds. Equity investment is the buying and selling of stocks listed on the Nigerian Exchange and NASD OTC market. Treasury bills are issued by the Central Bank of Nigeria (CBN) on behalf of the federal government; commercial papers are issued by corporate bodies to meet short term obligations. The federal government of Nigeria bonds/corporate bonds are issued by the federal government and corporate bodies, respectively, to meet capital projects,” he explained.
The Debt Management Office (DMO) Director-General, Patience Oniha, said interest on FGN Bonds is payable semi-annually; while the bullet payment is made on maturity. She explained that the bonds qualify as securities in which trustees can invest under the Trustee Investment Act. “They qualify as government securities within the meaning of Company Income Tax Act and Personal Income Tax Act; and for Tax Exemption for Pension Funds Administrators,” Oniha said.
The FGN bonds are backed by the full faith and credit of the federal government and charged upon the general assets of the country.
Treasury bills, FGN bonds’ yields
Already, market indicators showed that the Nigerian treasury bills secondary market sustained bullish run as average yield contracted by 24 basis points (bps) to close at 8.23 per cent from 8.47 per cent recorded in the previous week. Buying interests were witnessed across all tenors, as yields across the short and long-tenured instruments contracted by 15bps and 72bps, respectively. However, average yield on the medium-term instruments expanded by 14 bps as the 25-May-23 bill rose by 75bps.
“At the primary market auction last week, the CBN offered a total of N13.58 billion across the 91-, 182- and 364-day instruments. Stop rates on the 91-days, 182-days and 364-days contracted significantly by 99bps, 70bps, and 316bps respectively,” market report on rates movement showed.
The domestic bond secondary market sustained bullish streak as notable demands were seen across the curve despite 38bps rise in inflation to 21.47 per cent year-on-year. Hence, the average FGN bond yield contracted 62bps week-on-week to settle at 13.47 per cent from 14.09 per cent recorded in the previous week.
A further breakdown showed that average yields on the short-, medium-, and long-dated maturities (11.89 per cent, 13.96 per cent, and 14.34 per cent) witnessed the most buying interest declining by 85bps, 61bps, and 43bps week-on-week respectively. Specifically, the March-2025, the April-2037, and February-2028 instruments dipped 173bps, 155bps, and 117bps week-on-week, respectively. Findings showed that Nigeria has left behind, in 2020, a 10-year period when yields on Nigerian Treasury Bills (T-Bills) generally exceeded inflation, allowing fund managers to invest clients’ money in risk-free T-Bills with little need for sophisticated risk management.
Banks benefited from this as the primary destination of savings, as did pension funds. However, the fall in T-Bills rates in recent years, combined with a surge in the value of FGN bonds, demands a new level of risk management. Investment risk is rising as yields fall, and fund managers and investors need to master risk management and learn the benefits of diversifying their investments across asset classes. For instance, during the period between 2010 and 2019, the average T-Bills yield was 14.7 per cent and this was, on average, 2.6 percentage points above the rate of inflation. Savers and investors had it easy during this period, as all they had to do was to invest in T-Bills in order to beat inflation. Today, at T-Bills yield is around 8.23 per cent, and inflation rate is 21.47 per cent, which represent 13.24 per cent gap that investors have to absorb.
Hence, investors have to be a lot more subtle about what they invest in, take a degree of risk, whether that means investing in fixed income funds, credit solutions, balanced funds or equity funds. Accordingly, an investor’s choice of investment is determined by different factors, including if it is short or long term investment, and the returns on investment available at each point of the plan.
While some investors are moving from termed deposits to dollars funds, others are migrating from savings deposits to mutual funds. The fixed/tenured deposit is a tenured investment with a specific amount invested at an agreed interest rate and tenure. At the end of the agreed period (usually 30 to 180 days), and based on investor’s instructions, the investment can either be re-invested with or without interest earned.
However, more savers are going for mutual funds where returns have remained higher in recent years, Managing Director, Coronation Asset Management, Aigbovbioise Aig-Imoukhuede, said. “We are convinced that Nigerian savers are making the long-term transition from building savings with banks to a culture of saving with mutual funds. At just 11 per cent of the size of the pension fund industry, we believe that the mutual fund industry needs to support its momentum with confidence-building measures, first among them the adoption of market-to-market accounting and Global Investment Performance Standards (GIPS),” Aig-Imoukhuede, said.
He said that after a 10.6 per cent decline in total assets under management (AUM) in 2021, the industry is growing again, with total AUM up by 8.7 per to hit N1.52 trillion. The compound annual growth rate for the mutual fund industry between 2015 and 2021 was 33 per cent, or 14 per cent per annum in inflation-adjusted terms.
Inflation vs investors’ income
In an emailed noted to investors, Stanbic IBTC Asset Management explained what rising inflation does to people’s income and savings. It said: “Nigeria’s inflation was at 21.47 per cent in November 2020, a 17-year high. In practical terms, the prices of goods and services increased by 21.47 per cent between November 2021 and November 2022. That means a bag of onions that cost N100,000 in November 2021 increased by N21,470 in November 2022 to cost N121,470.
Findings showed that when the demand for goods and services outweighs the supply, buyers become willing to pay higher prices. Also, when there is increase in supply of money, without a corresponding increase in output or productivity in the an economy, it will lead to rise in prices.
As inflation rises, millions of Nigerians that kept their funds in current accounts where there is zero interest yield got poorer and may not be able to meet their daily obligations because their funds are gradually losing value.
Charles-Obi said: “I have learnt to invest in alternative assets instead of keeping idle funds in banks. That is the best way to beat inflation and strengthen your purchasing power.” Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE) Muda Yusuf, said that structural factors which constrain productivity across sectors, especially the real sector, decline in agricultural output, exchange rate depreciation, higher energy costs and security concerns in key food-producing states were major inflation drivers. “These structural-induced factors are beyond the control of monetary authorities and have made it increasingly difficult for the CBN to achieve its primary objective of price stabilization,” he said.
Inflation tracks the rise in the price of goods and services, which in turn shrinks the naira’s purchasing power. As inflation rises, consumers can only purchase fewer goods with the naira, input prices rise while earnings and profits drop leading to slow economic growth, until stability returns.
Pains, risks of dollar-based economy
Despite the benefits of dollar investments, the International Monetary Fund (IMF) warned that dollarising the economy could be difficult to reverse. As a partially dollarised economy, Nigerian operates with dollar bias for international trade, finance invoicing and of recent, store of value. In a report titled: “Digital Money and Central Banks Balance Sheet,” the IMF said that once a country gets used to a bi-monetary system, the process is not easy to reverse, even when the initial trigger such as high inflation, exchange rate volatility, subsides, are addressed.
“The optimal choice between domestic currency versus dollars will depend on the monetary framework and the benefits that each may offer as they co-exist as two currencies,” the IMF report added. The IMF explained that in a highly dollarised economy, like Nigeria, there is extended use of the exchange rate for price indexation (high real dollarisation and almost complete pass-through from depreciation to inflation).
“There is limited scope for fiat currency (tax payments, public expenditure, non- durable goods, and low- value transactions). Extended forex use for durable goods, real estate, capital goods, and high- value transactions. Also, forex takes over the role of store of value as lending capacity in domestic currency becomes limited. Most loans become forex- denominated when forex bank deposits are allowed,” it stated.
The IMF said a bi-monetary system embodies the failure to conduct monetary policy in an effective way, such as, secure price stability, efficient payment systems, and well-functioning financial markets (including long-run financial contracts at comparatively low nominal interest rates). It said that under high and persistent inflation as seen in Nigeria, market participants defend themselves by shifting to forex. “The most common type of dollarization is financial dollarisation, or asset substitution, caused by a poor performance of the local currency. The local currency is used more for payment transactions but is replaced by the dollar as saving asset or store of value,” it said.
The IMF said a bi-monetary system limits the role of the exchange rate as a shock absorber, as real dollarisation implies a high pass-through from exchange rate depreciation to inflation. “Financial dollarisation creates currency mismatches and liquidity risks for the financial system and the economy as a whole. Therefore, the exchange rate amplifies negative external shocks rather than absorbing them.”
The naira exchanges at N758/$ at the parallel market and N440/$ at the official market rate, creating a premium of N318/$. The naira has lost over 20 per cent of its value this year due to persistent dollar scarcity and rising demand for the greenback.
CBN speaks on inflation spike
The Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, lamented rising spate of inflation and the impact of foreign exchange shortage on achieving national development goals. For Emefiele, Nigeria’s 21.47 per cent inflation rate in November was relatively high and at an unacceptable level. He said higher inflation needs to be tackled with tools that can potentially constrain the economy’s fragile output growth and cause stagflation.
Emefiele explained that due to the resumed uptick of inflation rate in February 2022, the Monetary Policy Committee has raised its policy rate four times from 11.5 per cent to 16.5 percent in November 2022. “With the cumulative hike of 500 basis points, so far in 2022, we expect period of sustained disinflation will soon begin. The monetary policy tightening measures have led to subdued aggregate demand pressures expected to ease inflation,” he said.
Emefiele explained that the combined efforts of the monetary and fiscal authorities to ramp up food supply and tackle age long structural challenges are also expected to moderate inflation expectations and drive down food and core prices in the medium-term.
Other stakeholders’ views
The Chief Executive Officer, Standard Chartered Bank Nigeria, Lamin Manjang, said there was great uncertainty and volatility both globally and locally marked by rising inflation and slow growth. “We have seen a very aggressive tightening of monetary policy across almost all central banks in the world. In Nigeria, we have seen the same phenomenon of high inflation. But it’s not all doom and gloom. We have been through similar challenges in the past and we eventually came out of it,” he stated during the 2022 Global Research Briefing in Lagos.
Standard Chartered Bank’s Regional Head of Research, Africa & the Middle East, Razia Kahn, highlighted the need for greater reassurance on forex and other policy reforms in order for Nigeria to attract foreign investor participation.
“In terms of the policy response, Nigeria has perhaps been more tested than many other economies. A lot of the transmission of the different pressures into the great slowdown has been exacerbated by the policy decisions in Nigeria. Still, Nigeria stands apart from many of its African counterparts simply because it is seen to be an economy that has scale,” she explained.
The Group Managing Director, Afrinvest West Africa, Ike Chioke, said investors should know when to enter into the market, and most importantly, when to exit the market with profit. He attributed the shortfall in dollar supply to declining foreign direct investment, foreign portfolio investment, crude oil earnings and diaspora remittances inflows. “Investors should be proactively defensive in managing their portfolios. They should find high yielding instruments that will make them ride above the inflationary curve and get the desired protection for their investments,” he said.
Yusuf predicted that headline inflation would remain elevated in 2023 because the causative agents remain dominant. He said that a broad-based harmonisation of fiscal and monetary policies towards addressing the identified structural constraints will significantly help to moderate inflationary pressure in the medium term.
Former Executive Director, Keystone Bank, Richard Obire, said foreign investors understand the problems in developing nations like Nigeria which require a premium for them to find their economy attractive. “Foreign providers of short-term capital usually require appropriate interest rate compensation or sufficient currency repricing to embark on investments in relatively risky climes. These set of investors are likely to weigh the Nigerian offerings (in terms of interest rates, currency, and overall reforms) vis-a-vis those of competing markets going forward. All considered, we expect foreign investors to remain mostly averse to Nigerian risks next year,” he said.
According to him, authorities should embrace more pro-market paths to encourage foreigners to take on more naira risks. There should also be policies that will attract longer-term capital as opposed to fleeting hot monies. Promulgation and implementation of appropriate reforms, improvements in ease of doing business, provision of adequate infrastructure, and tilt to a more liberal currency regime are some measures that could be adopted.
Whether the investor choses to go for savings, mutual funds, T-Bills, Bonds, equities or dollar funds is a function of diverse factors. But whichever way the pendulum swings, an investment in any asset is by far a better option than keeping idle funds and taking the inflation heat 100 per cent.