FX hedging strategies for importers and exporters

As the naira remains under pressure and the oil price slump lingers, importers and exporters can make use of hedging strategies to mitigate losses in their businesses.

This is of acute importance as Nigeria is an import dependent nation, with a huge portion of its non-oil GDP and employment coming from trade.

Given that the spot USD-NGN is likely to continue to rise, Samir Gadio, Head, FICC Research at Standard Chartered Bank, recommends that “local oil companies and non-oil exporters maintain low FX hedge ratios…in the near term”. 

A hedge ratio is a ratio that compares the value of forward contracts purchased or sold to the value of the cash commodity being hedged.

Maintaining a low FX hedge ratio using forwards would provide increased protection from exchange rate risk, as the value of the forward contracts closely match the value of the commodity exposed to risk.

Oil exporters, including the Nigerian National Petroleum Corporation, currently face hurting receivables due to the slumping oil price. Apart from the use of forwards, this should be partly offset by a beneficial translation effect back to local currency due to the rise in USD-NGN, Gadio says.

On the import side of trade, “importers waiting to buy, but who are not eligible to access the RDAS window, [should] take advantage of temporary dips in interbank spot (for example, into sub-180 territory)”, recommends Gadio.

Nigeria imports mostly from China, the US, Europe and India, with invoicing still largely in USD.

Importers have conventionally left their USD payables un-hedged however; there has been a marked increase in client interest in hedging in recent times.

Gardio forecasts a rise in the local yield curve as the CBN attempts to protect the NGN, which would shift forward outrights up – increasing the cost of hedging with forwards in the near future.

Naira currently trades at N184 per USD with forward outright at around N186.

Facing pressure from declining FX revenues and reserves, the CBN devalued the official exchange rate, moving the Retail Dutch Auction System (RDAS) mid-point to 168 from 155 and widening the band around it to +/-5 percent from +/-3 percent. 

Interbank USD-NGN is already trading above the upper limit of the 5% band around the 168 RDAS mid-point and has seen spikes up to 187.

The recent exchange-rate adjustment in the RDAS and interbank FX markets may moderate the pace of reserve depletion; however, the lower oil price means that FX inflows (and reserves) will decline further.

According to Gadio, the 30-day moving average FX reserve position fell to USD 36.6bn on 1 December from USD 39.5bn on 2 October, indicating that the latest figures are even lower.

Gadio forecasts that the USD-NGN exchange rate is forecasted to reach NGN190 per USD in Q1 2015, before strengthening to NGN187 per USD in Q2 2015, and steadying at NGN185 per USD in Q3 and Q4 2015.

 Yinka Abraham