The Central Bank of Nigeria(CBN) decision to finally adopt a flexible exchange rate system is seen has bolstering investor’s confidence in the country’s stock market as a flow of liquidity will ease the pains of companies quoted on the floor of the bourse.
Companies in Africa’s largest economy have been grappling with liquidity crisis as a significant drop in the price of oil by more than 60 percent forced the Abuja based bank to impose capital controls in order to curb inflation and stop the continued haemorrhaging of friend reserves.
As a result of the restrictions, banks were starved of dollar currency and profits dipped while manufacturers were unable to import raw materials and meet obligations to suppliers. Also, the black market rate of N350 was increasingly inaccessible to business.
The naira was pegged at N197-N199.
The currency controls had significant negative impact on investor confidence, with foreign inflows dropping by 32 percent last year, the Nigerian Stock Exchange said in a report on its website on Dec. 19.
The benchmark equity index is down 17 percent this year, the worst performer globally after gauges in Shanghai, Saudi Arabia and Hong Kong.
Guinness Nigeria Plc, the second largest brewer said the liquidity squeeze made it practically difficult to pay suppliers of raw material components imported from abroad. The brewer added that it couldn’t pass on the costs to consumers who are groaning under rising inflation.
UAC of Nigeria Plc, a conglomerate giant in the country said a rigid exchange rate policy are holding back business decisions because of confusion over costs.
“Foreign portfolio investors will indeed be forced to look again at Nigeria – too many had withdrawn their capital and this was hurting growth. As they return, prospects for the economy in 2017 should improve,” Charles Robertson an emerging market economist at Renaissance Capital said, in an emailed note to BusinessDay.
Nigeria banking stocks have been falling and profit dipping since the apex bank reduced dollar trading. Many had issued profit warnings before the first quarter earnings seasons saying the headwinds will take a toll on earnings.
The Nigerian Stock Exchange Banking 10 Index is down -2.15 percent month to June 10.
Analysts say bank stocks and other quoted firms should rebound on the CBN news.
