Only a divestment of the Central Bank of Nigeria (CBN) as the sole supplier of foreign exchange (fx) to the nation’s recently introduced spotmarket would engender confidence in the economy, as well as encourage foreign direct investments, BusinessDay interactions with analysts show.
The implication, according to the analysts is that the CBN’s active participation through supplies of fx would lead to depletion of the nation’s foreign reserves, as well as put pressure on the naira.
“While active participation by the CBN in Nigeria’s spot market will of course reduce FX reserves, the hope is that the market will slowly wean itself off its dependence on the CBN as the main supplier of FX.
The spot market is still worryingly dependent on the CBN alone as a provider of FX liquidity, says Razia Khan, managing director, chief economist,Africa Global research, Standard Bank, London.”
Further investigations show that portfolio investors view the reopening of the FX market as a positive development, and as such, monitoring market developments, particularly price discovery and liquidity in the FX market over time but that the offshore appetite for NGN traded assets is yet to gather the momentum due to the overbearing tendency of CBN in the area of sypply of fx.
“Portfolio investors will likely view the reopening of the FX market as a positive development. They are monitoring market developments in Nigeria very closely. If price discovery and liquidity improve in the FX market over time, the offshore appetite for NGN traded assets could also increase gradually,” Samir Gadio, Head of Africa Strategy and FICC research at Standard Chartered Bank, said.
But some analysts say the monopoly of supply of fx to the spotmarket which commenced June 20, 2016 by the CBN may prolong the return of the portfolio investors, as the CBN might be constrained by the continued depletion of the foreign reserves.
They also see this development as well as activities of militants in the Niger Delta and recent remarks by President Muhammadu Buhari on the local currency as undermining the efforts of the CBN and FMDQ at returning sanity and confidence into the economy.
Khan further argues that, “a healthier development would be to see much greater autonomous flows over time.”
Boladeola Agbola, executive director, Cashcraft Asset Management limited, says , “the new regime is bound to deplete our foreign reserves initially but we will rebuild the reserves as the economy starts to grow again.”
This, according to Agbola is because the “CBN is responsible for over 70 % of foreign exchange supplies and so, will continue to determine the nature and depth of the spot market .It will take some time for other sources to grow and play leading roles in determining the quantity supplied and invariably, the pricing.”
Johnson Chukwu, managing director of Cowry Asset management limited, however belives that “The current stability in the foreign exchange market is partly driven by lack of liquidity in the banking system, which was occasioned by the withdrawal of funds through the debits on customers’ accounts for forex futures.
“The debits that were made on customers’ accounts for forex to be delivered between one and three months have effectively sterilised liquidity in the system and constrained forex demand. Market stability in exchange rate can only be achieved when naira liquidity is normalised after which actual demand level can be gauged.”
The CBN is believed to be aiming for a convergence of the spot, currently at about N282.02 and future dollar/ naira (USD/NGN) rate at a higher level of N225/$ in a year’s time, according to data from the futures chain of the recently launched Naira-Settled OTC FX Futures market.
The CBN OTC FX Futures rates released shortly after the launch last month, showed 10-month (April 2017) tenor rate at N210/$; 12-month (June 2017) tenor rate at N225/$; 9-month (March 2017) tenor rate at (N222/$); 6-month (December 2016) tenor rate at (N250/$); 3-month (September 2016) tenor rate at (N275/$); and 1-month (July 2016) tenor rate at (N279/$).
The CBN made history in the Nigerian FX market last month as it became the pioneer seller of the naira-settled OTC FX Futures contracts on FMDQ OTC Securities Exchange (FMDQ).
Consequently, corporate treasurers are now better able to make judgments on when to access the Spot FX market, managing more effectively, their liquidity positions.
John Omachonu
