CBN triggers much awaited FX market reform, traders say

…launches investors & exporters window in liberalised FX market.
Last week’s move by the Central Bank of Nigeria (CBN) to adjust the rules governing the operation of the foreign exchange (FX) market could be the long awaited tonic to bring life back to the supply side of the market, according to traders and analysts.

In a bid to further improve liquidity in the Nigerian Foreign Exchange (FX) Market, the apex bank quietly established a special FX window for Investors, exporters and end-users, via a circular dated April 21, 2017. The new window should be an attraction, particularly to foreign portfolio managers, as well as long term investors, many of whom have kept away from the Nigerian market for about two years.

The special FX window called the “Investors’ & Exporters’ FX Window” (the I&E FX Window) sets out a single and autonomous FX market structure and some now say it shows the resolve of authorities to enhance efficiency and facilitate a liquid and transparent Nigerian FX market.

According to Bola Onadele Koko, CEO of FMDQ, “the CBN has again demonstrated its unrelenting resolve to resuscitate and support the Nigerian FX market, back to its erstwhile vibrancy and possibly even better. This globally-monitored market is one that unarguably is deeply complex and kudos must be given to the CBN for continuously striving to ensure that the market operates for the ultimate benefit of the Nigerian economy.

The introduction of this new FX Window, amidst the other policy actions the CBN is executing in the FX market, is yet another expression of the CBN’s commitment to maintain FX market stability whilst striving to attract and retain foreign capital into the economy.”

The new FX Window shall cater mainly for invisible transactions (excluding international airline ticket sales’ remittances), bills for collection and any other trade-related payment obligations (at the instance of the customer) and will have Exporters, Foreign Portfolio Investors (FPIs), Foreign Direct Investors (FDIs), Authorised Dealers (Banks) and any other party with autonomous sources of foreign currency, sell US Dollars to willing buyers at mutually agreed rates. Under the guidelines just issued, the CBN may also participate in this window from time to time, as the apex bank sees fit.

Razia Khan, managing director, Chief Economist, Africa Global Research, Standard Chartered Bank, London, said in an emailed response to BusinessDay that “on the face of it, it’s an encouraging move – but everything will depend on the credibility of the exercise. This is especially the case, given last year’s false start. Will the rate at the special window really be market determined?”

Khan said offshore investors will likely want to see evidence of this before committing to Nigerian markets in scale again, adding that Bonds might rally though, with local buying in anticipation of renewed offshore investor interest.

Kabir Okunlola, partner, audit services, KPMG Professional Services, said by phone that the move by the CBN is to ensure sufficient supply of dollars in the market, which would help shore the value of the local currency. Okunola was concerned that the value of the naira has not been transparently priced.

A circular issued by the CBN on Friday, disclosed that the purpose of the window was to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.

The circular, signed by the bank’s director in charge of Financial Markets, Alvan Ikoku, listed eligible transactions under the new window to include invisible transactions such as loan repayments, loan interest payments, Dividends/Income Remittances, Capital Repatriation, Management Service Fees and Consultancy fees.

According to one analyst, the continued inclusion of the invisibles’ and bills for collections’ transactions in the CBN FX Window is a strategic move by the CBN to manage the likely over-heating of the new market and he also said the CBN will do well to give the new window time to take root.

Traders said the introduction of the I&E FX Window by the CBN is both an audacious and welcome move required for the resuscitation of the Nigerian FX market as it will serve to restore confidence,  improve transparency which is a major precursor for further inflows into the market.

The traders said the resulting improvement in liquidity of the market “will help reduce devaluation risk, provide necessary price formation and discovery, encourage efficient allocation of resources, bolster investments and promote hedging opportunities, thereby bringing integrity to the Nigerian FX market and restoring confidence and ultimately supporting economic development. “

In a statement by FMDQ, Onadele said on its part, the OTC Exchange will continue to support the CBN in the achievement of the common objective and other market stakeholders are encouraged to do the same. The Nigerian FX market is indeed on a certain path to recovery. Once the new market is firmly established, focus should be on convergence of the multiple exchange rates and resuscitation of the two-way quote driven inter-bank market complemented with optimal transparency, which made Nigeria an ideal destination of capital.”

The establishment of the I&E FX Window is seen as a strong signal by  the CBN to trigger the much awaited FX Reform agenda in alignment with the Federal Government’s Economic Recovery & Growth Plan (ERGP) as the new measures will promote  increase in supply and liquidity to the FX market which will in turn reduce exchange rate volatility and inflation in the near-term.

Furthermore, the CBN also reaffirmed its commitment to continue to bolster liquidity in the derivatives market by continuing to offer Naira-settled OTC FX Futures contracts of non-standardised amounts for different tenors from one (1) month through to twelve (12) months which will settle on bespoke maturity dates, providing liquidity in the product and enabling corporate treasurers effectively and efficiently manage their FX risk. This is also a much-welcomed development as the OTC FX Futures market continues to serve to, inter alia, minimise the disequilibrium in the Spot FX market and cause the rate to moderate; attract significant capital flows to the FMDQ-fixed income and equity markets; and achieve exchange rate stability.

Also, in keeping with the progressive nature of the introduction of the I&E FX Window, the CBN announced that it will, going forward, settle its OTC FX Futures contracts on the new Fixing (NAFEX) developed by FMDQ which will be reflective of the activities in the new FX Window. This clearly demonstrates the CBN’s total commitment to the establishment of an independent and well-functioning FX market.

NAFEX – The Nigerian Autonomous Foreign Exchange Rate Fixing is the FMDQ reference rate for FX activities in the Investors’ & Exporters’ FX Window and is designed to represent Spot FX market rate in the Window. NAFEX will be generated independently and objectively and published every business day at 12 noon or at a time advised by FMDQ.

 

PATRICK ATUANYA,  HOPE MOSES AHIKE & Onyinye Nwachukwu