• Thursday, March 28, 2024
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BusinessDay

Emefiele launches charm offensive to woo foreign investors

MPC embarks on retreat ahead of monetary policy decision Monday

The Central Bank of Nigeria (CBN) will meet all dollar demand as long as foreign reserves are above $30 billion and oil prices are not below $45 per barrel. The CBN also aims to maintain price and monetary stability, amid a bid to achieve higher growth rates for the next five-year term of Godwin Emefiele, even as bond yields are expected to remain elevated.

This was disclosed by Emefiele in London this week in a meeting with select foreign investors, who are being wooed anew amid signs of a growing backlog of foreign exchange (FX) demand, which sources tell BusinessDay is between $400 million and $500 million. Market sources add that about $200 million worth of the FX demand is a ‘permanent’ backlog from people who are always waiting for better rates from the CBN, which can be cleared at the Investors and Exporters (I&E) forex window. However, the balance of backlogs, between $200 million and $300 million, is said to be demand coming from corporates and airlines.

Emefiele during the confidence-building trip assured investors that his reappointment as CBN governor signals continuity of various policies.

“The market should know what he is about by now and for better or worse, more of the same is expected,” a source at the meeting said.

The CBN will offer more open market operations (OMO) auctions to counter the upcoming maturities due in September/October (having had fewer auctions of late) and could tighten liquidity to increase yields to maintain Nigeria’s relative attractiveness to Egypt for fixed income flows.

The governor also gave assurances that the CBN will not devalue the currency unless reserves dip below $30 billion (on a gross basis), at which point there would be an FX adjustment by 10 percent to about N400/$1, in line with current Purchasing Power Parity levels. But otherwise the naira peg to the dollar will be maintained and the apex bank will spend reserves first to meet dollar demand.

The CBN estimates that there are some $15bn in foreign fixed-income funds held onshore (in Nigeria), which it can handle.

Ayodele Akinwunmi, head, research, FSDH Merchant Bank Limited, said over N9.6 trillion worth of government securities are expected to mature in the financial market between August and December this year.

Sources present at the meeting say the CBN governor’s only evasiveness was on the progress of reserve build year to date (YTD), which he avoided when twice asked why reserves have been largely flat against strong inflows YTD and a generally healthy oil price.

The CBN gross dollar reserves stood at $44.6 billion as at August 9, 2019.

Emefiele added that there was no interest by the CBN for a crawling peg, or a free floating of the naira, adding that FX stability was the best choice for Nigeria.

Emefiele told investors in London that while Nigeria’s various FX windows have largely converged, they are not going to be collapsed into a single-rate as the many windows served a purpose in times of stress to get funds to different sectors of the economy when using regular bank channels would have resulted in FX only going to banks’ preferred customers.

Thus, the CBN was keeping these windows open for now just in case, Emefiele said.

Overall, the CBN acknowledged that policy is still very defensive and short-term-focused, with high short duration/term rates drawing foreign investors’ (FI) funds in. This tends to push yields down, leading to the funds flowing out and CBN responding with tightening/higher rates again.

Benchmark yields on Federal Government Bonds moved higher by 38 basis points to 14.1 percent last week at the fixed income market driven by profit-taking of offshore investors, prompting asset selloffs across the curve. In the Nigerian Treasury Bills (NTB) market, investor interest waned considerably as the average NTB yields trended higher by 135 basis points during the week.

Nevertheless, Emefiele said the CBN is expected to continue to maintain current policy until reserves are close to or surpass the $60 billion level and inflation is sustainable in the 6-9 percent band. If the Federal Government’s policies have promoted long-term growth, which means the market is more willing to extend duration, monetary policy restrictions will be eased, he said.

According to Emefiele, the CBN estimates that the 650,000 barrels per day Dangote Refinery under construction, set to be completed in 2020, will cut Nigeria’s import bill by 25 percent.

He noted that there is also a strong likelihood that government would withdraw from the fuel market and remove the inherent fuel subsidy after the refinery becomes operational.

Sources tell BusinessDay that Emefiele’s presentation to investors was generally well received.

 

HOPE MOSES-ASHIKE, OLUFIKAYO OWOEYE & OLUWASEGUN OLAKOYENIKAN