Surging yields luring foreign investors to return

Five meetings held by the Central Bank of Nigeria’s Monetary Policy Committee this year have produced five rate increases aimed at reining in accelerating inflation. 

At the last meeting in September, the monetary authorities extended the benchmark rate to 27.25%, a new record. It represents a cumulative increase of 850 basis points this year, establishing Governor Olayemi Cardoso’s reputation as a fiscal tightening hawk.

As can be expected, yields and borrowing costs have been rising in step with the monetary policy rate. At a 13 October Treasury bills auction by the central bank under its open market operations aimed at controlling liquidity, the regulator closed the deal at 24.3%. Dealers said the central bank chose that stop rate to keep the transaction to the N500bn on offer and avoid oversubscription.

As of 15 October, Treasury and Open Market Operations bills were trading with yields of between 21% and 25.96%, with bills due in June 2025 leading the pack. Yields on federal government bonds have been slightly more subdued, ranging from 16.73% to 23.71%, according to data on the Financial Market Dealers Association’s FMDQ platform.

Commercial papers, through which companies raise short-term financing for working capital and other uses, have led the way toward higher rates. Dufil Prima Foods Ltd., which manufactures the popular Indomie noodles brand, is among the first companies to sell commercial papers since the latest central bank rate increase. An offer repayable in April 2025, at 27%, opened on 10 October, with subscribers given a week to take up the offer.

One of the first issuers to reach the 30% mark for yields is SKLD Integrated Services Ltd., with 270-day notes that closed on 4 September. A separate 180-day duration offer had an interest rate of 28%.

The N5bn, 270-day commercial papers offered by C&I Leasing two days after the Central Bank decision, had a yield of 29%. The Lagos-based company, which is engaged in equipment leasing and logistic services in Nigeria and Ghana, closed the offer on 4 October.

Similarly, two tranches of commercial papers issued by investment bank DLM Capital Group for N5bn, with durations of 180 days and 270 days, attracted yields of 26.9% and 29% each. Both offers closed on 26 September, two days after the central bank raised its key rate.

When Dangote Cement, Africa’s largest manufacturer of building materials and one of Nigeria’s most profitable companies, sold 177 and 266-day commercial papers in May for N150bn, the yield was 5% and 6% respectively.

But Dangote Sugar, with less formidable credentials in the same group, raised two tranches a month earlier for a total of N42.79bn at 23% for the shorter tenor and 25% for the longer tenor, indicating that less risky issuers can still raise funds more cheaply.

Effective bait

The high yields on debt have proved to be an effective bait for foreign portfolio investors seeking higher returns. “This high return on debt instruments drew substantial foreign interest,” analysts at Lagos-based Cowry Asset Management said in a recent note to clients. “This strong performance in money market and debt instruments indicates the critical role elevated interest rates played in attracting foreign capital.”

Foreign capital flows into Nigeria surged in the first half of this year to $5.98bn, over double the $2.16bn recorded for the same period in 2023, according to data provided by the National Bureau of Statistics.  

Even more interesting is the difference between the first and second quarters of this year. With the first rate hike of 400 basis points in February, there was an inadequate response time for investors, who brought in more than $1bn by the end of March. Inflows in the second quarter reached $2.6bn, more than double the figures for the preceding three months.

At least $3.48bn or 58.2% of the funds that came in between January and June have gone to portfolio investments, a more-than-threefold increase from the $750m spent on the same category of items during the comparable period last year. Out of the funds that went into portfolio investments, $2.68bn went to money market instruments, $598m went to bonds and equities attracted $199m. The money market investments targeted mainly Treasury bills, open-market-operations bills and commercial papers.

CBN Governor Yemi Cardoso (pictured right), briefing the Parliamentary Committee on Finance on 15 October, said he was satisfied with the trajectory of the monetary policy measures taken under his watch. “We anticipate a significant moderation in inflation by year-end as our policy measures take effect in the real economy,” he said. 

“While the current trends are encouraging, the Bank remains vigilant, focused on implementing policies that ensure monetary and price stability to support sustainable economic growth.”

Rate hike strategy

With Nigeria threatened by runaway inflation that was made worse by exchange-rate pressures, Cardoso chose rate hikes as a strategy to moderate inflation while attracting foreign portfolio flows to help ease the pressure on the naira. 

It’s an approach that also saw Nigeria sell its first foreign-currency domestic bond in September, a $500m offer that got a total of $900m in subscriptions at 9.75%. Nigeria’s foreign reserves jumped 12.74% from the end of June, to $39.12bn as of 11 October, according to Cardoso, reversing the depletion of recent years.

Banks have emerged among the major beneficiaries of the current high interest rate regime. Guaranty Trust Holding Co., which operates Nigeria’s largest bank by market value, reported a threefold increase in net income for the first half of the year to N899.9bn($543.7m). In all, the country’s top 12 banks combined recorded a 100% growth in profit before tax in the first six months compared with last year.

The manufacturing sector has been a clear loser, and small- and medium-sized businesses in general have been stumped by the sharp rise in borrowing and production costs and the inverse decline in consumer demand. 

The Manufacturers Association of Nigeria reported a 43% increase in the inventory of unsold goods among members in the first half of this year and vehemently criticised the latest rate increase.

Manufacturers now face interest rates above 35% when they want to borrow, according to Segun Ajayi-Kadir, who heads the manufacturers’ lobby group. Many companies were forced to cut back on research as well as expansion plans, given that production costs were increasing at a time of shrinking consumer demand. “The broader implications of these challenges threaten not only the manufacturing sector but also the Nigerian economy as a whole,” said Ajayi-Kadir.

For Johnson Ayodele, a 46-year-old businessman who invested in a poultry farm two years ago, the venture now appears doomed. “The cost of running the poultry has really shot up beyond what I can afford,” he said of the farm, located on the outskirts of Lagos, Nigeria’s commercial capital. “If I dare to take a loan with interest rates above 30%, I won’t be able to pay it back. I feel stranded.”