Nigeria may have momentarily bought time to fix its comatose foreign exchange market, after it extended by three months, to the first quarter of 2017, the date for a $1 billion Eurobond sale initially scheduled for 2016.
By delaying the Eurobond sale, Nigeria is trying to buy time to implement necessary foreign exchange reforms, on concerns that investor appetite may hang in the balance until the country adopts a true naira float, according to Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.
“Investors want to see reforms in the market and extending the timeline for the Eurobond sale may be a signal that Nigeria is listening to what investors are asking,” Ibrahim said in an emailed response.
Vice President Yemi Osinbajo, who chairs the country’s economic management team, said Tuesday, that the proposed Eurobond would be delayed till the first quarter of 2017 and that the country was working to make its foreign exchange market more flexible.
Osinbajo’s comment is spurring sentiments among traders of naira depreciation at the official market, given that the big devaluation in June came four weeks after the Vice President told investors in a conference, on May 11, that changes were being made to the Foreign Exchange market structure to boost its supply side.
Buoyed by these sentiments, traders raised bets on a further depreciation of the naira, as deduced form the naira non-deliverable forwards, a kind of gauge of the future value of the naira.
Naira non-deliverable forwards weakened by the most this week on Wedenesday, November 30, as one-month non-deliverable forwards depreciated by 1.85 percent to N326 per dollar, from N320 in the run up to Wednesday, according to data sourced from the Bloomberg Terminal.
This implies a naira depreciation by 4.82 percent to N326/$ in the period from the spot price of N311/$.
Two-month forwards also declined by 1.79 percent to N340/$ from N334/$ on Tuesday, while three-months forwards weakened 1.99 percent to N358/$ from N351/$ on Tuesday.
The naira closed at N316 per dollar on November 29, the day Osinbajo commented on the market, the biggest monthly loss since Nov. 3; but has gone to strengthen by 1.42 percent to N311/$ as at 2:00pm on Wednesday.
At the paralelel market, the naira crashed to N480/$ on Wednesday Nov. 30, weaknening the most in the month of November.
“We may not see another devaluation since the naira is already undervalued as it stands, but there is certainly going to be a refinement of the current foreign exchange situation,” said Ibrahim of Chapel Hill Denham. “The entire market is not efficient and there is need for arbitrage to be taken out.
“There should also be reforms like instilling transparency in the foreign exchange bidding process, as well as pulling down a list of 41 items banned from accessing dollars in the official market,” Ibrahim added.
On the flip side, however, a government source said the Vice President’s comment that the foreign exchange market was being reviewed was inappropriate and untrue.
The source, who chose to be unnamed, said Vice President Osinbajo knew little about the foreign exchange structure inter-workings and was in no position to give out such details, which gives the impression that, the Central Bank of Nigeria (CBN) reports to his office. Our source says such statements from the vice president and even the president tend to undermine the independence of the CBN and its perception to make monetary policy decisions devoid of interference from the political authorities.
Nigeria announced it was liberalising its foreign exchange market on June 20, bringing an end to a 15-month-old peg, which had triggered foreign capital outflows.
But five months down the line, it appears another peg is in place as monetary authorities have placed an invisible hold on how much the naira can be exchanged for the dollar.
The naira has hovered tightly around N305/$ on an average daily trade in the last two months, while the spread between the official and parallel market has indicated of the CBN’s hold on the currency. The naira traded at N480/$ at the parallel market on Wednesday, taking the spread between the official and parallel rate to N175.
The parallel market has become the closest gauge of the naira’s value as investor confidence in the official market wanes.
Allowing market forces determine the value of the naira is critical to restoring that confidence, says Charles Robertson, the chief economist at Renaissance Capital Ltd, by phone.
The wide spread between the official and parallel exchange rate is a boon for round tripping, contradicting the stance of President Muhammadu Buhari to fight corruption.
LOLADE AKINMURELE
