Naira still under pressure, struggles to converge between the Central Bank of Nigeria, (CBN)’s so-called Nafex currency-trading market, which the central bank set up for foreigners in late April to try end a crippling shortage of dollars and the official rates.
While the naira is trading at about 315 against the U.S. currency in the official market.
Nigeria’s recent tentative steps to free up its naira currency, particularly via a new trading window, have gone down well with some adventurous stock and bond investors who are cautiously returning to the markets they fled two years ago.
Once considered one of the most promising emerging markets, Nigeria was hammered when it introduced draconian foreign exchange restrictions to counter the effects of the 2014 oil price crash.
These will take years to unwind, some analysts fear, while others are concerned the new trading facility could come under pressure if oil prices were to take another tumble, or trade through it could slow if Nigeria’s currency reserves run low.
The much-criJun.sed move starved the economy of dollars, throttled foreign investment and plunged Africa’s largest economy into recession for the first time in more than 25 years.
But authorities have since tried to normalise the currency market and alleviate dollar shortages, most recently via the “Investors & Exporters FX Window”, which allows investors and traders to swap nairas for dollars at market-determined rates.
Transactions in the Nigeria Autonomous Foreign Exchange Market (NAFEX) also known as the Investors and Exporters forex window have reached $3.8 billion since its introduction in April.
According to agency reports, foreign exchange dealers said that there have been continuous improvements in dollar inflow into the NAFEX from foreign investors due to increased confidence in the window. For example the volume of dollars traded in last market increased to $407 million last week from $354.8 million in June.
According to the Financial Market Dealers Quote (FMDQ), $85.66 million was traded in the market yesterday while the indicative exchange rate dropped to N361.86 per dollar from N365.02 per dollar in June. This translated to N3.16 appreciation for the naira.
The naira also appreciated by 50 kobo in the parallel market yesterday, as the exchange rate dropped to N367 per dollar from N367.5 per dollar last month. Bureau De Change (BDC) sources attributed the appreciation to weak demand for dollars. Meanwhile, the Central Bank of Nigeria (CBN)’s injected $142.5 million into the inter-bank foreign exchange.
Acting Director, Corporate Communications Department, CBN, Mr. Isaac Okoroafor confirmed this saying the apex bank offered $100million to dealers in the wholesale segment, while it allocated $23 million to the Small and Medium Enterprises (SMEs) segment. He said that those requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA) received $19.5 million.
Stocks Race Up
Nigerian stocks climbed to more than two year highs on Monday, yesterday, lifted by gains in Dangote Cement as investors piled into the shares in anticipation of its half-year earnings.
Dangote Cement, which accounts for a third of total market capitalisation, rose 2.44 percent to lift the main share index 1.86 percent to a level last seen in May 2015.
Traders said investors were expecting strong a half-year performance from listed firms as results start pouring in this month.
Sub-Saharan Africa’s second biggest stock market had put in a lacklustre performance after a sharp fall in crude prices from mid-2014 led foreign investors to flee its financial markets.
The drop in oil prices also pushed the economy into recession, triggered a currency crisis and forcing the central bank to introduce controls.
The new window has re-opened the doors to the carry trade in naira – one of the few such opportunities on the continent outside South Africa, said Yvette Babb, executive director for sub-Saharan Africa research and strategy at J.P Morgan.
Babb estimates foreign portfolio outflows from Nigeria were around $6 billion last year, but added:
“Depressed equity prices and high local currency yields in combination with the exchange rate adjustment is likely to give rise to further foreign portfolio inflows.”
But NAFEX still has plenty of critics. Above all, investors are worried by authorities’ failure to guarantee that the window will remain available in future, especially in the event of another sharp decline in oil prices.
Secondly, the central bank sold more than $4 billion from February to May to narrow the gap between the official and black market exchange rates. But with reserves of just over $30 billion, it is doubtful it can keep selling at such a pace.
“In the case of oil production coming down again, it is not clear that the currency will adjust and you could go back to a position where the market goes completely illiquid again,” Emso’s Weeks said.
And those betting that NAFEX heralds a swift and full-fledged naira liberalisation may be disappointed.
Although an exporter of oil, Nigeria’s reliance on imports for fuels such as gasoline is a drain on foreign exchange.
The government has pledged to end its reliance on oil product imports by 2019 – and the two are connected, Babb said.
“Markets are expecting more exchange rate liberalization in the next six months, but policymakers seem to be seeking convergence by 2019,” Babb added.
So more conservative investors are holding back. For instance Guy Tousso, portfolio manager for emerging markets fixed income at BNP Paribas Asset Management, is waiting for a functioning naira market to return but says it is inevitable.
“They are getting there, but it is a slow pace in Nigeria because the social impact will be negative. But I don’t think they have any choice.”