Five major economic impacts of new CBN FX window

… Bolsters Investments and allocation of resources.

… Manufacturing capacity set to grow.

… Stocks rally 2.2% led by big caps.

… FX Trading closes at N377/$.

The newly introduced foreign exchange window for investors and exporters can lift investor confidence in the foreign exchange market, improve price discovery, unfreeze dollar inflows from Foreign Portfolio Investors (FPIs), initiate the gradual re-introduction of a liquid inter-bank market and boost production capacity in the manufacturing sector, analysts say.

The new import and export (I&E) FX window closed at N377.11 per US dollar on Monday, after being quoted at an opening price of N372 per dollar, according to FMDQ data. Data on total volumes was however not provided.

The Central Bank said last Friday after the close of trading, that the rates will be market determined, as monetary authorities look to return dollar liquidity to the market hard hit by acute dollar shortages brought on by a slide in oil revenues and lukewarm portfolio inflows.

Stocks responded positively to the news, as the All Share index gained 1.97 percent to close at 25,685, according to NSE data, while the banking sector stock index rose 2.2 percent, the most since Jan. 9, with lenders’ earnings expected to be boosted by increased dollar liquidity.

Other major gainers included; WAPCO (+10.24%), ETI (+4.93%), 7UP (+4.45%), DangCem (+3.77%), GTB (+3.59%), NB (+2.82%), Zenith (+2.07%) and FO (+1.12%).

“It is an important step in the right direction, but not a game changer until people get confident it will last, be liquid, and be liquid even if the oil price fell,” Charles Robertson, global chief economist at investment firm Renaissance Capital said by email.

The supply of FX at the new window will come from portfolio investors, exporters and authorised dealers (Deposit Money Banks), while transactions eligible to access the window will include loan repayments, interest payments, dividend/income remittances, capital repatriation, bills for collection and other eligible invisible transactions, as detailed under ‘miscellaneous payments’ in the CBN’s foreign exchange manual.

As to the price discovery process, the exchange rate of transactions at the window will be as agreed by the Authorised Dealers and their counterparts i.e. on a willing buyer and willing seller basis.

“On the basis that transactions will be conducted at a market determined rate, we think this is a positive step and is indicative of a possible move to a more flexible FX market in the near term,” said Cardinal Stone Partners, in an April 24 note to investors.

“We also foresee increased foreign participation as key constraints around liquidity and transparency, which have hitherto deterred investors, will be addressed by this new framework,” Cardinal Stone added.

Foreign inflows into Nigeria slumped to a nine-year low of $5.1 billion in 2016, as investors fled on the back of capital controls. Portfolio inflows fell by as much as 70 percent in the period, according to the National Bureau of Statistics.

Nigeria, amid its first economic recession in a quarter of a century, has suffered from a dearth of foreign exchange after the price of oil, its main source of revenue, collapsed. While crude prices have since risen, there is an estimated $4 billion backlog in the foreign exchange market that is yet to be cleared, traders say.

“The major issue now is clearing that backlog and I think the new window may inspire some confidence that this may happen, given that the CBN has been able to clear the BTA backlog,” said Tajudeen Ibrahim, head of research at investment bank, Chapel Hill Denham.

“While this may initially lead to mass exit of investors who still have their funds trapped in the system, if efficiently implemented and creates liquidity, it will put Nigeria back on the map for investors who are looking away on the basis of the foreign exchange crisis,” Ibrahim added.

It could also be viewed as a big step towards being re-admitted on the JP Morgan bond index from which Africa’s largest economy was kicked out of in 2015, at the height of a dollar crisis.

Although Ibrahim says it will be gradual and largely dependent on the ability of the new window to boost dollar liquidity.

Razia Khan, Chief Economist, Africa Global Research at Standard Chartered Bank, London, said before the re- inclusion of Nigerian bonds or equities in any indices, or indeed the return of foreign investors, it is likely that there will be a need to see the return of foreign portfolio investors in scale.

“Index inclusion is only likely to be realistic once we have seen a proven improvement in foreign exchange liquidity on a lasting basis,’ Khan said by email.

“From this perspective, it’s still early days for the newly-established window.  The key condition to watch is whether pricing remains flexible for some time, and also how much additional FX supply from ‘autonomous sources’ will be attracted to this window,” Khan added.

The naira has traded at around 305 per dollar on the interbank market since August. The black-market rate plummeted to a record N520 against the greenback in February, but recovered to N390 after the central bank sold $3 billion in forward contracts and on the spot market.

Three-month non-deliverable forward contracts on the naira rose 1.3 percent to 356.6 per dollar at 12:58 p.m. in Lagos, the highest on a closing basis sinceMarch 6, suggesting traders see the currency’s weakening about 12 percent in that period. Six-month contracts rose 1.5 percent to N377.5.

Traders say the CBN’s naira manipulation has barricaded other sources of supply into the market, crowning the apex bank as the sole supplier of dollars.

“I think the new forex window is a gradual move towards a market determined exchange rate albeit limited to a segment of the economy,” said Taiwo Oyedele, PwC head of tax and regulatory services.

“The new policy should ease the difficulties which legitimate businesses and investors have been facing for a long time. I don’t think all the concerns and uncertainties in the FX market have been sufficiently addressed for a re-entry of JP Morgan Bond Index,” Oyedele added.

The residual uncertainties will be addressed only when there is close to full convergence of the various FX rates and less restrictions like removing the 41 items banned by the CBN to access FX, according to Oyedele.

Ayodeji Ebo, managing director, Afrinvest Securities limited said investors are more interested in the consistency and sustainability of the new CBN move to provide FX liquidity.

“Market participants are closely watching the effectiveness of this window and how it’s able to attract remittances from Nigerians in Diaspora as well as foreign inflows,” Ebo said.

 

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