• Monday, February 26, 2024
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Naira finds some relief as markets digest CBN actions

The naira pared some of its recent losses against the dollar on Thursday as markets digested the latest policy decisions from the Central Bank of Nigeria (CBN) to prop up the country’s embattled currency.

On Wednesday, the CBN ordered banks to reduce their excessive foreign exchange exposure by February 1 (Thursday) in a bid to shore up dollar supply. It said the net open position limit of banks’ overall foreign currency assets and liabilities both on and off-balance sheet should not exceed 20 percent short or zero percent long of shareholders’ funds unimpaired by losses, using the gross aggregate method.

The apex bank also removed the cap on exchange rates quoted by International Money Transfer Operators (IMTOs), allowing them to quote exchange rates for naira payout to beneficiaries using the prevailing market rates on a willing seller, willing buyer basis.

Previously, IMTOs were required to quote rates within an allowable limit of -2.5 percent to +2.5 percent around the previous day’s closing rate of the Nigerian foreign exchange market.

The naira appreciated to 1,400 per dollar on Thursday from a record low of 1,520/$ on Wednesday at the parallel market, commonly called black market, data collated from different street traders show.

“The reason for the removal of the cap is to incentivise the IMTOs to transparently transfer their receipt into the country,” Aminu Gwadabe, president of Association of Bureau De Change Operators of Nigeria (ABCON), said.

He said the IMTOs were hitherto not remitting the actual remittance proceeds into the official market but mostly kept it in the jurisdictions of receipts at parallel market rates.

“It is hoped with the removal of the cap on IMTOs proceeds, the diversion from the official markets of the proceeds will be reduced drastically or eliminated. The likely impacts will be an increase in liquidity in the market which will influence exchange rate and stability positively,” he said.

“Already, we have started seeing the local currency appreciating against the dollar in the parallel market by about 6 percent from N1,520 yesterday to N1,420/$ this afternoon in the market.”

The ABCON boss called on the management of the apex bank to sustain the tempo. “There is the urgent need in the immediate time to consider the effective transmission mechanism roles of the BDCs through their inclusion as the third leg of the market,” he said.

Nigeria’s currency today is the cheapest and best value of any in Africa, or any of the emerging or frontier markets, according to FIM Partners’ currency model.

“Globally, only the Japanese yen is cheaper (and that’s a pretty unique story). The model doesn’t have Lebanon/Venezuela/Zimbabwe,” said Charlie Robertson, head of macro-strategy at FIM Partners.

Following the CBN’s directives to banks, the volume of dollar transactions by willing buyers and willing sellers, consisting of banks, exporters and investors, increased by 85.36 percent in the Nigerian Autonomous Foreign Exchange Market.

The daily FX market turnover increased to $134.07 million on Wednesday from $72.33 million on Tuesday at the official market.

The naira appreciated to 1,455.59 from 1,482.57 on Tuesday, data from FMDQ Group shows.

Analysts at CSL Stockbrokers said the FX market may not witness a significant influx of liquidity despite CBN’s directive for banks to sell down significant net long FX positions running into billions of dollars in 24 hours.

“Many of these dollar assets are not in cash. Firstly, we believe that many banks will require CBN to grant a forbearance and will find other ways besides throwing liquidity into the market to comply such as negotiating the conversion of foreign currency loans to naira loans, a conversion that many customers would likely require, given the devaluation of the naira,” they said.

They said banks with swap positions with the CBN may likely take on the naira equivalent of such positions.

“We do not believe many banks will be in the market to sell dollars, so we do not expect a significant influx of liquidity into the FX market,” they added.

They pointed out that banks that decide to sell their dollar assets at current exchange rates would make significant realised gains which would boost their 2024 earnings.

According to them, banks with more FX liabilities may suffer revaluation losses when there is a devaluation of the naira, although banks will likely avoid such a position if the currency points to a devaluation.

The analysts said the loss of revaluation gains may weaken banks’ capital adequacy ratio (CAR), and impact banks’ ability to boost capital.

“The new CBN directives imply these windfall gains from long FX positions will no longer be available to boost capital following a devaluation, which may imply a weakening of the Capital Adequacy Ratio (CAR),” they said.

The directive may also negatively impact customers’ ability to access foreign currency loans, according to them.

“We also believe these new directives will likely reduce banks’ appetite for foreign currency assets, which earn less than local currency assets and may have negative consequences for the supply of foreign currency loans to support needed projects.”

Analysts at SBG Securities expect CBN’s policy changes on banks’ FX exposures to have mixed effects on the Nigerian economy.

“We anticipate a positive impact on foreign currency liquidity in the interim, as banks move to achieve the new regulatory limit set by the central bank. We estimate a range of USD4 billion – USD6 billion of liquidity that could potentially enter the market as banks attempt to sell down the excess above the new regulatory limit of 0 percent long,” they said.

They however said some banks might have the long position on their balance sheet but without the liquidity in the immediate and may need forbearance from the CBN as they might not be able to meet “the very tight deadline”.

“We anticipate the market reacting negatively to this information in the interim, as the impact of the policy on bank earnings in the short-term is assessed. However, as the Central Bank continues to take steps to address the FX liquidity situation, we think that market expectations for green shoots appearing over the medium to longer term might not be out of reach,” they added.