Will illiquidity wane investors’ appetite for bond market?

In the realm of Nigeria's financial markets, market liquidity has become a key player in shaping investor sentiment towards the bond market. Kingsley Nwaiwu, the Head of Consumer Sector Sales at Global Markets Stanbic IBTC, shed some light on the current trends and movements in the fixed income and FX market in a recent interview with CNBC Africa. Nwaiwu discussed the recent tight system liquidity, which opened the week at 2.3 trillion Naira, and the impact it had on investors' appetite for bonds. The market saw a significant decrease in liquidity, closing at 1.43 trillion Naira due to the OMO auction where the Central Bank of Nigeria sold about 905 billion Naira to investors. Foreign portfolio investors dominated the subscriptions, injecting approximately $430 million into the system, leading to increased illiquidity. The yields on the OMO auction hit 32.4%, contributing to the challenging liquidity environment. As a result, several banks faced constraints in participating in CBN's FX interventions, indicating the severity of the liquidity crunch. The market's future trajectory remains uncertain, pending any substantial inflows from the government to alleviate the liquidity strain. The current inflation rate of 32.7% adds another layer of complexity, necessitating strategic monetary interventions to stabilize the Naira. Nwaiwu also highlighted the potential impact of rising core inflation linked to fuel price hikes and food inflation due to security challenges affecting agriculture. These issues underscore the importance of addressing fundamental structural weaknesses in the economy to regain investor confidence. The conversation then shifted towards foreign direct investment (FDI) and the need for sustainable reforms to attract long-term capital inflows. While portfolio investments demonstrate some level of interest, FDI inflows at a mere $29 million for a quarter unveil a significant confidence gap among foreign investors. The depreciation of the Naira by 150% over the last year adds to the concerns, signaling the urgency for robust economic policies to restore stability. Foreign investors are cautiously observing the reform landscape, seeking clarity and predictability before committing substantial capital. The prevalence of shareholder loans over equity investments reflects investors' cautious optimism, enabling quick exits in the face of market uncertainties. The bridge to regaining investor trust lies in fostering a conducive macroeconomic environment, bolstering confidence in the long-term economic outlook. As Nigeria navigates its financial challenges, strategic interventions must address liquidity constraints, inflation pressures, and investor confidence to propel sustainable growth in the bond market and attract vital FDI.