Nigeria’s newly elected government has no more than six months of grace to set things straight in the foreign exchange market, or risk losing an estimated $3.6 billion worth of investments in its naira bonds.
The loss would be occasioned by New York-based lender, JPMorgan Chase and Co. making real its warning to remove Nigeria’s 1.8 percent share of a $200 billion emerging markets government bond index (GBI-EM), if “liquidity, transparency and minimal hurdles for investors to transact” are not restored to the foreign exchange market.
In a statement released earlier this month, JPMorgan said, “Nigeria’s status in the GBI-EM series will be finalised in the coming months but no later than year-end.
“If we are unable to verify these factors [liquidity and so on], a review of Nigeria’s status within the benchmark for removal will be triggered.”
Since November 2014, the Central Bank of Nigeria (CBN) began a series of interventions in the foreign exchange market, in a bid to stem a run on the naira.
Pressured by high election spending and heavy foreign portfolio withdrawals at the time, the CBN devalued the naira by eight percent by shifting the exchange rate midpoint from US$1/N155 to US$1/N168, and widening the band to +/-5 percent from +/-3 percent.
Three months later, in February 2015, the apex bank completely abandoned the official auction window, opting for the inter bank exchange market in settling forex demand and supply – which was in effect a further 15 percent devaluation on the local currency.
The combination of these measures and other capital controls has restricted the easy flow of foreign exchange, leaving the market highly illiquid.
JP Morgan now seeks a “reliable record of liquidity, transparency and minimal hurdles for investors to transact” in Nigeria. It hopes that the “additional time” will be a second chance, and sufficient for the new administration to address this.
Recall that the investment bank had placed Africa’s largest oil producer on “index watch negative” on January 16, and planned to take a decision in five months (June).
Analysts do not expect Nigeria to be kicked out of the GBI-EM, but fully acknowledge that an illiquid market is a deal breaker in the country’s investment attractiveness.
According to Samir Gadio, head of African strategy at Standard Chartered Plc, who spoke to Bloomberg earlier in the month “It is in no one’s interest to have Nigeria removed from the index.”
This is especially so, when one considers the international debt market as one of the very limited options the country has to raise the much need funding for infrastructure development and day-to-day running of the government, in a time of low oil revenues.
“One of the most significant borrowers in the [SSA] region is Nigeria, which has delayed borrowing because of elections but it may have plans to issue later this year. Nigeria’s external debt is tiny , just three per cent of GDP , so there will be more issuance” said Charlie Robertson, chief economist at investment bank Renaissance Capital, quoted by the Financial Times of London.
Razia Khan, Standard Chartered Chief Economist for Africa, thinks that, “as soon as the interbank market opens up again and it is clear that there is two way trading for the naira, we will see better conditions in place.
“For foreign investors, the key is that there is a working foreign exchange market and that they are able to see how demand and supply interact.” Khan said in an interview with BusinessDay on the sidelines of the 2015 World Economic Forum on Africa, in Cape Town. She however noted that getting the market liquid once more may come at the cost of another round of devaluation.
“Nobody is going to put money into Nigeria, if they think there is a chance of a big devaluation. So a lot of them are waiting on the sidelines, and you won’t see the big foreign portfolio flows coming in until we see that adjustment in the currency.” Khan explained.
“Our forecasts at Standard Chartered see a gradual opening up of the market, so our end Q2 Dollar – Naira forecast is N207, and our end Q3 forecast is N220. And then maybe just a very modest move beyond that.
“I think the market is going to clear, if the amount of outstanding demand for foreign exchange is going to be met, then we will have to see that [devaluation],” she concluded.
Although the current market illiquidity and naira measures were inherited from the immediate past Goodluck Jonathan’s administration; newly elected president Muhammadu Buhari seems yet to have a stance, except for the widely alleged campaign promise of making “naira equal to dollar” – easily dismissed as the work of overzealous supporters to win much needed swing votes at the time.
The current reality is a naira exchange rate closer to US$1/N200, which the Central Bank has tweaked twice in the past weeks. The jury is out, as to whether this was a real appreciation or a mere guidance by the CBN, in preparation for a new foreign exchange policy – perhaps on how to loosen the currency market.
AKIN-OLUSOJI AKINYELE
