Nigeria President Muhammadu Buhari has endorsed plans by the Central Bank of Nigeria (CBN) to move to a flexible exchange rate market. According to Businessday, the President gave his approval for the CBN to begin implementation of the flexible exchange rate system, Thursday, June 02 upon receipt of a memo from the monetary authorities.Market watchers say this should bring to an end investor uncertainty and doubts since CBN Governor Godwin Emefiele said on May 24 Nigeria would introduce a flexible exchange-rate regime to boost investments and curb dollar shortages plaguing Africa’s largest economy.
Nigerian stocks which rallied to 6 months highs of 28,902.25 points from 27,231.5 points on the day of the statement by the CBN have since lost all their gains and closed at 27,098.18 points yesterday as investors show displeasure at the lack of clarity from policymakers.
Businessday expects that a key goal before the CBN re-introduces flexibility in the FX market will be to clear the backlog of dollar demand estimated at $4 billion, which has led to trapped funds of firms operating in Nigeria from Nampak to British Airways.
Market sources said late last night that the government’s goal to clear this backlog would be helped by news that Nigeria is set to receive inflows of $2.5 billion from a Chinese Bank and an African Developmental Finance Institution within the next 3 weeks.
“In order to ensure that there is a good balance between demand and supply at the particular time of reintroducing flexibility in the market, it would be critical that this pent-up demand is cleared up. In addition clearing this unmet demand would also help in determining the equilibrium exchange rate,” a senior government source speaking anonymously said.
Businessday learnt yesterday from the market that one way the new FX framework could be set up would be for the CBN to re-introduce weekly auctions of a predetermined amount, “say $500 million per week,” and of this the idea would be that no single bidder would be allocated more than a maximum amount (1-5 percent) during each auction.
This would ensure that no single bidder can get a disproportionate amount during an auction.
As for where the naira could potentially see equilibrium once the backlog of dollars are cleared and the interbank market opens for trading, government officials say there could be an initial volatility of the dollar/naira (USD-NGN) over a period of 3 – 4 weeks before getting some form of stability around a midpoint speculated to be around N250 plus or minus a trading band to be set by the CBN.
The government and the Central bank expect that traders would adhere to the market rules to be unfolded by the apex bank, and it is expected that the CBN would periodically intervene in the market to keep rates around acceptable limits.
Given that traders would be allowed to transact anonymously, it is expected that the CBN interventions would be discreet.
Market watchers also expect that a single FX window would be operated by the CBN to eliminate corruption as it seeks convergence between the new market FX rate and the black market rate
A concern in the market however is that in the push by the government to limit volatility, it may focus on in and out movement of funds by foreign portfolio investors, and market players now fear this could lead to rules to curb the indiscretion of portfolio managers to move in and out at will.
“I have consistently argued in some of my past policy statements, the time has come for Nigeria to impose some form of restrictions on the inflow of foreign ‘investments’ into the country. This should be specifically aimed at discouraging short term portfolio inflows,” Uche Chibuike, a member of the CBN monetary policy committee (MPC) said in communiqué No. 106 of the MPC meeting of Monday and Tuesday, March 21 and 22, 2016.
Analysts say any re-introduction of minimum holding period for bonds and equities will be perceived as negative by investors.
“The sentiments for equities will even be worse if a minimum holding period is introduced given the steps the NSE has been taking in the last few years to improve market structure and raise cross-border participation,” Oluwatosin Ojo, head of Research at investment firm Cardinal Stone Partners, said in response to BusinessDay questions on impacts of any new capital controls.
“An effective and transparent framework will receive some market acceptance rather than the current opaque system where funds of international investors are trapped in Nigeria. Any form of limited control must come hand in hand with a definitive, workable strategy to improve FX supply such as a loan from a multilateral agency alongside the planned $1 billion in Eurobond.”
Introducing a minimum holding period for bonds has little benefits for Nigeria with the cons of such a move highly outweighing the pros, analysts tell Businessday.
“It could deter future portfolio inflows. Investors will want to have the option to exit the market freely. Nigeria will also be competing against other mainstream emerging markets that allow unrestricted transfer of capital. The minimum holding period would further delay any re-inclusion in the GBI-EM indices if it is considered again in the long run,” Samir Gadio Head of Africa Strategy and FICC Research at Standard Chartered Bank tells Businesday.
