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Documenting Your Dollar
Investing and trading in emerging markets debt requires a greater attention to detail than most other asset classes. Every jurisdiction has different regulations and market practices that can have real consequences if run afoul. Understanding these market structures in order to maximize performance is an unglamorous yet critical piece of emerging markets trading and what the EMsights Capital Group refers to as operational alpha. The mundane nature of this work often leads to it being overlooked by many emerging market investors.
One example of this critical work is management of the Certificate of Capital Importation (CCI) in Nigeria. CCIs are issued by the Central Bank of Nigeria (CBN) when an investor brings US dollars into the country. This electronic document verifies the source of funds and investment in Nigeria. More critically, however, the CCI is required to repatriate the investment. Investors may be forced into an illiquid parallel non-CCI market or may not be able to repatriate their funds at all if the CCIs are not in good order. The CCI process is largely invisible to investors when running smoothly and, as a result, is frequently not part of the trading process for many managers. Sophisticated emerging market managers, however, know that the CCIs can present a liquidity risk when there are issues and will therefore proactively manage this risk.
The CCI process is under pressure now due to the recent rush of foreign investors in Nigeria following the depreciation of the Naira earlier this year and recent changes in the CCI infrastructure. As a result, many investors have not received the CCIs for all their Naira trades, especially those trades executed in April 2024. These investors may not realize their CCIs were not issued until they attempt to repatriate funds and discover they are unable to do so. Investors who identify the missing CCIs and resolve the issue now, rather than when they wish to repatriate, will have a competitive advantage in Naira liquidity. The reconciliation of these CCIs is a great example of the unglamourous work that is both an extension of risk management and leads to operational alpha.
Nigeria is hardly the only example of operational alpha in emerging markets debt. Each market in this universe has its own unique nuances that present risks and opportunities. Too many emerging markets investors overlook the importance of these nuances. Sophisticated managers recognize that studying market structures is a critical component of the emerging markets debt investment process.
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