…as foreign investors stay away
The Central Bank of Nigeria’s (CBN) deliberate policy of capping the exchange rate between the naira and the US$ through tight management of market operators is putting pressure on Nigeria’s dollar reserves and raising questions on the sustainability of the current policy.
Nigeria’s foreign reserve balance has declined by US$2.41 billion or 9.10 percent to $23.95bn in October from $26.36bn recorded at the end of June 2016, according to data from the CBN.
But analysts have questioned the true position of the nation’s foreign reserves, as no one is sure of the value of undisclosed outstanding forwards contracts and foreign exchange swaps.
“The International Monetary Fund (IMF) estimates that net inflows into reserves from foreign exchange swaps were in the region of $4.8 billion in 2014 and 2015, which means that the CBN net reserve position is much lower than the gross position,” says David Cowen, Africa economist at Citibank, in a note to investors last week.
Traders have grown pessimistic and see a bleak future for the foreign exchange market should the CBN continue to keep a tight hold over the exchange rate of the naira.
“Post devaluation policy mistakes have undone the initial good work. There has emerged a more serious crisis of confidence over the foreign exchange market,” said Cowen.
The CBN again on Wednesday, Nov. 2, 2016, engaged in a special intervention of 60-day and 90-day Foreign Exchange Forwards sale to the agriculture, raw materials and machinery sectors of the economy, barely a week after its similar intervention to the same sectors of the economy.
Analysts say with the current volatile earnings from crude oil being the major source of foreign currency to the Federal Government, the onus almost solely rests on the CBN to relinquish its futile bid to continue funding foreign currency backlogs from its scarce and finite resource.
“The CBN intervention (or allocation) has little to no impact on the current liquidity crisis in the foreign exchange market, thereby calling for a more sustainable means of rejuvenating the vibrancy of the Nigerian foreign exchange market,” a dealer speaking anonymously told BusinessDAY.
Despite the interventions, the CBN’s Manufacturing Purchasing Managers Index (PMI) which shows the level of business activities in the manufacturing sector in any given month, stood at 44.1 index points in October 2016, which implies a manufacturing sector that is contracting.
Top manufacturing firms such as the Dangote Group and Erisco Foods have signalled that the persistent dollar woes are to blame for the shutdown of their major tomato plants in Nigeria and there will likely be a shift of production to other countries overseas.
Nestle Nigeria; the country’s largest food manufacturer, reported a 97 percent fall in after tax profits for the third quarter of 2016 as dollar related costs rose.
“Although the gross profit increased by 8.2% for the same period, net profit has been adversely impacted by the revaluation of the foreign loans due to devaluation of the Naira,” Nestle said in an October 27 statement to the Nigerian Stock Exchange (NSE).
Also the CBN interventions have not stopped the Nigerian Naira from continuing to lose its value against the US Dollar, losing 7.93 percent in the inter-bank market, during the week-ending November 4, 2016 to close at ₦328.90 to the US$ following a week low of ₦304.75 to the US$.
This depreciation, however, saw a reduction in the spread between the rates in the inter-bank market versus the BDC and parallel markets by about 15.35 percent as the parallel market rate stood at ₦469 to the US$ during the same week.
Trading activity in the spot foreign exchange market between the banks and their clients for the week-ending October 28, 2016 stood at $478.59 million (average daily turnover of $95.72 million), representing a 45.22 percent increase from the $329.56 million (average daily turnover of $65.9 million) recorded in the previous week, whilst turnover in the spot foreign exchange market amongst banks recorded for the same week, revealed a 41.99 percent decline as a total turnover of $71.00mm (average daily turnover of $14.20mm) was recorded against the $122.40mm reported for the previous week ended Oct. 21, 2016.
The data reveals that the instability and illiquidity in the Nigerian foreign market remain consistent.
The lack of transparency story also is a consistent in the Nigeria foreign exchange market, as trades continue to be executed at rates not visible to the wider and global markets, while the participants and watchers in these markets are being forced to look for the information from sources that may not reveal the entire picture, sources tell BusinessDay.
For instance, International Money Transfer Operators and Nigerians abroad are offered rates for their foreign currency, which are (the rates) not “allowed” for other types of trade.
Even the CBN executes its transactions at levels that vary significantly, whilst the transparency challenge being faced does not allow for this to be captured.
“This confusion, no doubt, leads to uncertainty, further depreciating the value of the nation’s currency. Is the CBN inadvertently contributing to this high exchange rate in the country, perhaps?” a second Bank Treasury source tells Business Day.
“International capital market observers, however remain cautiously optimistic as they continue to see Nigeria as a viable investment zone. Should there be a clearly defined roadmap to resuscitate the nation’s foreign exchange market, foreign investors, who are fundamental in addressing the liquidity challenge, remain willing to participate in the market,” the source said.
The CBN, in its drive to attract foreign capital, should take immediate steps towards fully implementing the liberalisation of the Nigerian foreign exchange market, and take a cue from the Central Bank of Egypt; which recently free floated its currency, the Egyptian pound, Treasury sources tell BusinessDay.
Sources say the Naira-settled Over the Counter Foreign Exchange (OTC FX Futures) product launched in June 2016 still proves to be a product these investors are willing to embrace as, whilst offering a compelling reason to bring in foreign capital to the nation in terms of potential returns, it addresses one of their crucial concerns – Foreign Exchange rate risk mitigation.
“Unfortunately, the potential of this innovative product cannot be fully maximised if the current ‘situation’ in the Spot Foreign Exchange market persists,” the treasury source said.
