Last week the Central Bank of Nigeria (CBN) essentially bluffed the markets as it dismissed plans to devalue the naira, adding that it was “able and willing to meet all genuine and legitimate FX demand” with the current level of reserves.
In a statement the apex bank said “unscrupulous persons and FX dealers” involved in speculative trading against the currency will be charged for economic sabotage once unravelled by an investigation in collaboration with the Economic and Financial Crimes Commission or EFCC.
However by Friday the CBN had to basically eat its words as it devalued the rate at which it sold dollars to Foreign Portfolio Investors (FPIs) to N380.2/$, from around N366/$.
The CBN had been courting these class of investors in a bid to shore up its dollar reserves and maintain price stability.
The apex bank also moved the official rate of the Naira to $360/$ in a bid to reduce the gap between the various segments of the markets.
Global market sentiment as well as domestic realities had forced the CBN into these actions.
The slump in oil prices due to a collapse in demand and excess supply meant there was little or no dollars flowing into the country from the sale of crude.
Another just as serious problem arose however, when there were only N18 billion of bids materialising last Thursday for N150 billion worth of open market operation (OMO) bills the CBN attempted to sell.
Being that FPIs were the major participants in this market, it clearly showed that they were demanding higher rates as well as an exchange rate that cleared closer to the market rate.
The naira had already weakened some 13 percent in the black market and fell to a record low at the Investors and Exporters window the prior week.
The CBNs gross dollar reserves meanwhile dropped below the $36 billion mark last week, a signal of the increasing vulnerability of the bank to global market conditions.
After all most emerging market and commodity currencies had already adjusted lower from the Kazakhstan Tenge to the South Africa Rand.
Godwin Emefiele, the CBN governor had told investors last November that it would take oil prices of $45 per barrel and external reserves of $30 billion to rethink the bank’s exchange rate policy.
As at the time the CBN adjusted the currency on Friday, one of those metrics had already been breached, which is the oil price.
The adjustment undertaken by the CBN is positive for the economy because it is unhelpful to pretend that Nigeria can withstand the more than 50 percent slump in oil prices without adjusting its currency, when oil makes up 95 percent of exports.
Also the Naira was already overvalued according to Real Effective Exchange Rate (REER) measurements, due to the high annual inflation in Nigeria, since 2017.
This adjustment will therefore help to keep some dollar flows in the country, as well as send a signal that the CBN is not rigid or averse to reforms.
There has also been adjustments made to the rate at which international money transfers to Banks are disbursed (now N376/$1), which is positive for diaspora flows.
For the macro-economy the adjustments to the FX rate should act as some form of shock absorber as the FG and sub-national states, and spenders of inflowing dollars get to have a little more naira, which should help plug some of the deficits to FG, States and individual budgets amid the ongoing slowdown.
Building a corona-proof portfolio
While global markets continue to meltdown, there are indeed bargains emerging with some fund managers applying lessons learnt from the last major selloff more than a decade ago.
During that downturn (2008/2009) stocks like Google and Amazon came through relatively unscathed, as investors bet on continued growth for the tech firms.
In Nigeria, while the markets appear broken (as well as several stocks), with ugly charts and many sitting at multi-year lows, the fundamentals of some of the companies remain sound.
Therefore in thinking of dipping ones toes to buy at these levels investors must ask themselves what companies are resilient enough to withstand the carnage as well those that may even benefit from social distancing.
Some that come to mind include data providers and Telco’s. There will be growing demand for Voice, internet and data as more employees work from home or get their entertainment from Netflix.
This means the likes of MTNN and Airtel Africa should be looked at especially since they are both selling close to their listing prices.
Financials are another set that have sold off massively in just 2 weeks or thereabouts.
Investors should consider those that are best in class, with solid balance sheets. Banks may gain from more electronic transfers and e-commerce at this time.
Some consumer goods firms may see a surge in demand for provisions and beverages as Nigerians stock up their refrigerators.
Industrial firms that are cyclical in nature are also a sure bet to rebound once the Virus disappears.
One that generates significant free cash flow, as well as is diversified across Africa, with strong balance sheet and large dividend is Dangote Cement. The stock is at a 4 year low!
