Gap closes between new window and black market rate

Portfolio investors looking for glimpses that God- win Emefiele, Nigeria’s Central Bank governor, will keep his promise regarding the newly introduced foreign ex- change window will be satisfied to see that the parallel market rate is within N10 per dollar of the new window.

The Central Bank opened a foreign-exchange window for investors and exporters on Mon- day, in its latest attempt to beat a dollar crunch that has pushed Africa’s largest economy into its first recession in a quarter of a century. Emefiele promised to tolerate a weaker naira and allow the market determine the rate in the new window.

The naira has now weakened for two consecutive days at the new window, after sliding 24 percent to N378 per US dollar

in early trading on Wednesday, compared to the CBN quoted rate of N306 to the US$. It weakened 22 percent on Tuesday.

However, the said rate- the Investor & Exporter (I&E) rate as it is called- is within N10 of the parallel market rate, which was N388 per dollar Wednesday.

That the parallel market rate is only a few percent away from the rate at the I&E window, “is the first signal that the Nigerian naira now has the flexibility investors needed to see,” said Charles Robertson, chief economist at London-based Renaissance Capital, in a twitter response.

Meanwhile, Nigerian stocks, which have since rallied on the back of the introduction of the new window, fell for the first time in three days, as the All Share Index (ASI) declined 0.8 percent to 25,620 points, according to figures from the Nigerian Stock Exchange (NSE).

While it may appear too early to properly give an assessment of the window, Pabina Yinkere, head of research at Lagos-based Vetiva Capital, says that there is every chance that the rate at the I&E window may set the tone for a convergence among the various FX market rates.

“It may not be this year, but if the new market works as planned, chances are that other rates will collapse into this rate,” Yinkere said by email.

Investors are still licking their wounds from a crunching dollar shortage that saw their money trapped within the system, which failed to ease even after the CBN announced plans to adopt a flexible exchange rate last June.

Despite claiming to liberalise its foreign exchange market, the CBN has since kept the official rate at around N305 per dollar.

That’s more than 27 percent stronger than its black-market price of 388.

Still full of memories of CBN’s false start to market liberalisation in June, the sceptre of who goes into the new market first is stalking portfolio investors who had been bitten once and are now twice shy.

The main concern among investors is that the Central Bank changes its stance and tries to manipulate the exchange rate, as it has done in the past.

“It is still early days but not much trading is happening just yet, as nobody wants to be the first to put his foot in the water,” a trader told BusinessDay on con-dition of anonymity. “Maybe in another two weeks we may begin to see activities rise, but for now the CBN is probably the biggest player in this market.”

The CBN is said to have sold $25 million on Tuesday, but the rate at which the amount was sold is un- known, neither is the percentage the sale represents of total transaction volume on the window.

“Investors are constantly asking us questions on how the new market is faring, but we are un- able to provide much information because we do not have an idea of trading volumes,” said Ayodeji Ebo, acting managing director at Afrinvest Securities Limited.

“The CBN needs to work with FMDQ to engender transparency by publishing data on volumes, this way we can have a sense of how the supply-side of the market is shaping up,” Ebo added.

FMDQ OTC Securities Ex- change, the Lagos-based trading platform, only publishes opening and closing rates for the market at 9 a.m. and 4 p.m, based on a poll of authorized bank dealers.

It also announces a fixing rate around noon, known as the Nigerian Autonomous Foreign Exchange Rate Fixing, or NAFEX, which serves as a benchmark for derivatives, including futures and forwards.

According to the apex bank, supply of foreign exchange at the new window will come from port folio investors, exporters and authorised dealers (Deposit Money Banks), while transactions eligible to access the window will include loan repayments, interest  payments, dividend and income remittances, capital repatriation, bills for collection and other eligible invisible transactions, as detailed under ‘miscellaneous payments’ in the CBN’s foreign exchange manual.

Traders say trading volumes are still scanty at the new window, but confirmed that the CBN sold $25 million Tuesday, with export-ers demanding as high as N420 to the US$ for their dollars.

Nigeria has suffered from a dearth of foreign exchange inflows since the price of oil, its main export, plunged in 2014.

The Central Bank’s imposition of capital controls and a currency peg only worsened the crisis, according to investors who have

pulled money out of the country in the past two years.

Foreign investments in Nigeria fell to a nine-year low of $5.1 billion in 2016, according to NBS data, while local participation

on the stock exchange outpaced foreign participation for the first time since 2009 in the period.

 

LOLADE AKINMURELE