Going into H2-2020, the major factor to spur the need for FPIs to hunt for juicy yields will be the policy decisions by global monetary authorities. The expectation remains that monetary tools will be deployed to bring economies back on the path of growth, such as cutting key policy rates.
As a result, FPIs will continue the carry trade in H2-2020, focused on emerging and frontier markets. For Nigeria, we believe the current low OMO yield environment is driven by large foreign net-outflows from OMO maturities, and the challenges surrounding FX supply, as the CBN is yet to resume intervention sales at the I & E window.
Therefore, depending on when the CBN opens the tap on dollar supply (in form of intervention sales at the I & E window), we expect a massive outflow of foreign capital in Q3-2020, as FPIs are displeased with any form of capital restriction or control.
However, given the global low-interest-rate environment and the positive trajectory of oil prices since its crash in Apr-2020, we believe a gradual return to the Nigerian OMO market is highly possible. In all, the return of FPIs to Nigeria’s market in H2-2020 is a tough call,
which also depends on the CBN’s resolve to preserve FX flows, versus the need to save the Nigerian economy from an impending recession.
United Capital Research