Investors use gold ETF to get cash out of Nigeria

Exchange-traded funds (ETFs) have been lauded for everything from democratising investment to boosting market liquidity. In Africa, savvy investors have hit on a less-obvious benefit: aiding their escape.

Foreigners are using a gold ETF to pull cash out of Nigeria amid the country’s ongoing dollar shortage. Portfolio managers are buying the Newgold Issuer ETF in the nation’s commercial capital, Lagos, using naira. Then they transfer holdings to the fund’s primary listing in SA and sell for rand.

As a trade it’s an almost certain money-loser. But activity in the ETF has been gradually increasing as investors decide it’s worth paying up to get assets out of Nigeria and into other more liquid markets.

“The ETF has been listed on the NSE for a few years and frankly, nobody cared to look at it until June,” Akinbamidele Akintola, an equity analyst at Stanbic IBTC Stockbrokers, wrote in a note last week. “The market discovered that there is fungibility play here to get money out of Nigeria to the JSE.”

Nigeria has been grappling with a shortage of dollars after the economy was hit by the coronavirus and collapsing price of oil — the source of most of its foreign earnings.

Greenbacks are generally obtained in the country’s investors and exporters window, but the central bank stopped selling dollars in March and only resumed limited sales three months ago. Turnover now averages about $150m, down from about $300m to $400m at the start of the year.

Against that backdrop, activity in the Newgold ETF has surged. Year-to-date about 50-billion naira ($128m) worth of shares in the fund have been traded, compared to less than 60-million naira for all of 2019. Assets have soared to 17-billion naira, 20 times their January level, according to the latest data on the Nigerian Security Exchange Commission’s website.

The fund closed on Monday at R262.56 ($17.42) in Johannesburg and 7,656 naira ($19.83) in Lagos, meaning investors pay about 14% more to buy the shares in Nigeria.

At times the premium has risen to as high as 30%, according to Jolomi Odongharo, head of research at Cordros Capital. Fear of devaluation and the opportunity-cost of keeping money in Nigeria mean investors are willing to take the loss, he said.

“There are other markets with greater potential and stronger macro fundamentals,” he said.

Bloomberg