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The Nigerian and South African economies will come closer to being equal in size once the new foreign exchange market unveiled by the Central Bank of Nigeria (CBN),kicks off trading on Monday.
The interbank market, which has been trading around a pegged rate for 16 months, is likely to start trading at a rate between the fixed rate of N197 and the black market rate of N370 to the dollar, treasury sources said yesterday.
South Africa’s nominal gross domestic product (GDP) was estimated at R4.0 trillion for the year 2015, by its statistics agency (Stats SA).
Nigeria’s National Bureau of Statistics (NBS) estimates the country’s nominal GDP to be N94 trillion at the end of 2015.
The South African rand currently exchanges for 15.37 per dollar, meaning the country’s R4.0 trillion GDP is equivalent to $260.2 billion.
Nigeria’s N94 trillion economy would be equivalent to $268.5 billion if the exchange rate were to move to N350 per dollar when trading begins on the 20th.
However there is also the issue of growth, which is a major factor in determining how big both countries nominal GDP will be by the end of 2016.
South Africa’s economy contracted by a dismal -1.2 percent in Q1, 2016, while Nigeria’s contracted by 0.37 percent.
The liberalisation of the FX market is a necessary condition for a rebound in growth for the Nigerian economy, according to Olutola Oni, head of research at investment firm, WSTC financial services Ltd.
“The introduction of flexibility into the FX market will lead to a re-pricing of the naira at both the parallel and interbank market segments. This will improve confidence in the CBN’s FX management and attract foreign portfolio and direct investments,” Oni said.
Guidelines on the new net open position (NOPs) regulations that will govern primary dealers however hint at the CBN’s unwillingness to accept excessive naira weakness, meaning the naira may trade much higher than the N350 – N370 levels.
Net open positions will be set at 0.5 percent of “shareholder funds unimpaired by losses” for long dollar positions.
Foreign exchange dealers hosted by the Financial Market Dealers Association (FMDA) met on Thursday to determine trading spreads and any “circuit-breaker” mechanism that might curb trading if the naira (NGN) depreciates by a certain amount.
Banks that can provide two-way quotes in the necessary size, have the right infrastructure in place, are sufficiently capitalised (Tier 1 equity of at least NGN 200bn or a minimum of NGN 400bn in total foreign currency assets) are sufficiently liquid, and have a history of compliance with CBN regulations, will be eligible as primary FX dealers.
Like South Africa, macroeconomic concerns are likely to persist in Nigeria despite the CBN’s embrace of currency flexibility, analysts say.
“Our projection is for Nigeria’s current account (C/A) deficit to widen further near-term. Falling oil output will be a key source of stress on C/A receipts. Even with currency flexibility, this is unlikely to be fully compensated for by other inflows, at least in the near term. Nigerian FX reserves will likely remain pressured. More will be needed to boost confidence in the new FX regime,’’ Razia Khan Africa chief economist at Standard Chartered Bank, said in a note to investors.
The prolonged decline in oil prices have slashed the nation’s foreign exchange earnings, while the CBNs dollar peg heavily eroded reserves which increased macro pressures.
The CBN’s dollar reserves are down to $26.4 billion as at June 14, from over $40 billion in 2014.
Analysts say raising interest rates and sterilising excess liquidity in the money market will attract confidence in the naira, especially since Nigeria’s entire bond yield curve is currently negative with respect to headline inflation which touched 15.58 percent for May.
“The CBN will need to act with haste by hiking rates, as ongoing naira weakness may punish Nigerians further while causing inflation to spiral uncontrollably. As the nation finds normality in the future and slowly diversifies away from being oil-reliant, economic growth should improve and this should naturally boost the value of the naira that is now on a free floating exchange,” Lukman Otunuga, a research analyst at forex trading firm FXTM, said.
PATRICK ATUANYA
