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As Nigeria today embarks on a historic move to re-open the interbank foreign exchange (FX) market and have the value of its currency, the naira (NGN) completely determined by market forces, analysts say to expect initial wild volatility and a currency that trades much higher than parallel market levels.
Nigerian bank treasurers including, Michael Anyimah, Head of Trading, Zenith Bank Plc, Dapo Olagunju, Group Treasurer, Access Bank Plc and Adebayo Omogoroye, Head of Trading at Guaranty Trust Bank Plc in a Friday conference call hosted by investment firm Renaisance Capital, say they expect the NGN to trade anywhere between N270-N300/dollars (USD), and note the likelihood of some volatility in the initial days of trading.
The Central Bank of Nigeria (CBN), last week issued revised guidelines for a single, “market-driven” inter-bank FX market, open to authorised dealers and other entities.
Analysts say where the NGN will settle today will be largely dependent on how aggressively the CBN supplies dollars through the primary FX dealers to the interbank market, and on how much dollars will be supplied from autonomous sources.
“A number of bank treasurers and FX traders expect the rate to be between N250/USD and N300/USD. Demand backlog is estimated at $4 billion, which certainly can’t be cleared in one day or even a week. However, if a substantial amount is supplied on Monday (much higher than historic trends of $150/200 million), we may see the exchange rate settle closer to N250 than to N300,” said Tosin Ojo, head of research at Cardinal Stone Partners, in response to questions.
The naira should find support from the United States Federal Reserve’s decision to leave its policy unchanged on Wednesday.
Higher rates in developed markets tend to draw inflows away from emerging markets like Nigeria and they are expected to rise only once this year.
Nevertheless, foreign investors will probably need to be convinced that a more flexible and liquid FX platform can be sustained for longer before resuming the purchase of NGN debt.
“Foreign investors will likely require higher yields to compensate them for the risks associated with the Nigerian market. With the yield curve being now in negative consumer price index CPI-adjusted territory, the risks to market rates may still be to the upside if the CBN seeks to anchor investor expectations,” Samir Gadio, head of Africa strategy and FICC research at Standard Chartered Bank, London, said in response to questions.
Defending the naira at the N199 level had lowered reserves and increased external vulnerabilities, while a shortage of hard currency weighed on the non-oil economy.
Establishing the new FX framework’s credibility will be vital to its effectiveness in attracting portfolio flows and foreign direct investments (FDI) to make up for lower oil export receipts, Fitch Ratings said in a note on Friday.
“An increase in FX liquidity would support a potential recovery in growth in 2H16,” Fitch ratings said.
The CBN will probably continue to mop up liquidity aggressively once the new flexible FX regime begins today, analysts say.
The bank sold N205.9 billion ($1.03 billion) worth of one-year bills on Friday at 13.5 percent, compared with the secondary market rate of 10.81 percent, traders said.
“We see this move by the CBN to further prepare grounds for a strong interbank opening. We would expect to see the interbank FX market trade at the N260/$ to N280/$ range,” said Abiodun Keripe, head of research and strategy at Elixir Investment Partners Limited.
In terms of re-inclusion of Nigerian debt in the JP Morgan GBI-EM and Barclays indices, analysts say it is still early days, though given the size of the Nigerian debt market and secondary market liquidity; there may be a case for index re-inclusion in the long term.
“Global providers of equities and fixed income indices such as the JP Morgan Chase & Co may consider restoring Nigerian securities in their indices as FX liquidity improves,” said Tajudeen Ibrahim, head equity research at Chapel Hill Denham, in an emailed note to BusinessDay.
“In addition, we think investors’ concerns around the certificate of capital importation (CCI) should be explicitly addressed by the CBN as quickly as possible,” said Ibrahim.
Seven Nigerian banks – FBNH, Zenith, GTBank, UBA, Access, Diamond and Union Bank, meet the requirement of minimum of N400bn in total foreign currency assets, minimum shareholders funds unimpaired by losses of at least N200bn and minimum liquidity ratio of 40 percent to become FX primary dealers(PD), sources tell BusinessDay.
Appointment of these banks as FX PDs implies they control a relatively higher proportion of FX market volumes, which should be positive for their net interest revenues, analysts say.
Nigerian stocks hit a three-week high on Friday, driven by gains across banking and consumer goods stocks.
The main share index climbed for the third straight day, rising 2.66 percent and closing above the psychological level of 29,000 points.
“It is our opinion that this new policy is positive for the equities market and will result in the resurgence of the market. As much as we are aware that this policy still requires fiscal responsibility to be effective, we are optimistic that this is the right step for the economy at this time,” Chuks Anyanwu, head of research and strategy at investment firm GTI securities said.
PATRICK ATUANYA, BALA AUGIE & LOLADE AKINMURELE
