New FX framework working as stocks erase 8-day loss

A head of Monday’s launch of a foreign exchange interbank trading window which will boost the supply side of the US dollar in Africa’s biggest economy, investors bid stocks up in reaction to the Central Bank of Nigeria’s (CBN) pro-market foreign exchange (FX) policy.

After days of bearish trade, the equities market turned fairly bullish Wednesday and successfully erased a record eight-day loss with value additional of N294billion.

Nigerian stocks rallied across all sectors in Wednesday session as clarity from the CBN on the new foreign exchange framework lifted investor confidence towards the close of trading.

Nigeria has had an FX restricted market in the past 18 months which affected foreign portfolio inflows.

The CBN yesterday released the new framework for the operation of the Nigerian foreign exchange market.

“The new framework is a bold move that we expect to engender the much needed transparency and liquidity in the market. The CBN was confronted with two options: devalue or float the currency.

“The former would have been subject to more debate as nobody can determine what the true value of the currency is until we have a free market,” Kayode Tinuoye, head, research, financials at United Capital plc said in an emailed response.

“I think the decision to float will be well received by foreign portfolio investors though there will be initial volatility after which the market is expected to find an equilibrium,” Tinuoye added.

The window’s exchange rate will be purely market-driven, according to Godwin Emefiele; CBN governor. Emefiele added that it would help with economic growth and restore investor confidence.

The new window would have eight to ten primary traders handling minimum volumes of $10 million, according to the apex bank governor.

“This framework will be well received by the market. Expect the stock market to rally in the coming days. The new structure introduces an active forward market and licensing of primary FX dealers for large size transactions. We think this is a good development that will further deepen the market,” said Pabina Yinkere, head, research division, Vetiva Capital Management Limited.

The analyst’s first take is that the new framework is pro-market, adding “After this, we think execution will be vital in how successful this new structure becomes. As the market takes off at this early stage, expect a lot of volatility until the workings are properly fine-tuned.”

Bayo Adeyemo, country treasurer and markets head at Citi Nigeria, in his reaction to the development said the new FX framework is very positive for the market and the economy. “The primary dealers will be very critical for the success of the market. Traders will start to make prices as soon as the CBN provides the liquidity to take-off. This shows that  the CBN is interested in the success of the FX interbank market. If the currency adjusts (market determined), it will take more naira out of the market”. 

Nigeria has been suffering from foreign exchange shortages due to a slump in oil revenues which have crippled public finances and hit currency reserves.

Also reacting to the CBN’s new FX framework, Kyari Abba Bukar, Managing Director and Chief Executive Officer of Central Securities Clearing System Plc (CSCS) said, “It is very encouraging because it is going to bring in confidence into the market. I do believe that increased level of confidence. In case of volatility, we shouldn’t panic because there will be natural stability.”

IHEANYI NWACHUKWU