I&E FX window offers Nigeria light at end of the tunnel

Leaders of the FMDQ OTC exchange recently met with virtually all the top market movers in London, including representatives of leading fund and asset managers, banks and investors.  BusinessDay sat at these meetings. In this second of a five-part report on the series, “Looking in from outside”, Publisher, Frank Aigbogun provides an account of what investors in London think about the new investors & exporters FX window and their quest for more market transparency.

For one whole week, FMDQ OTC exchange leaders met with virtually all the top market movers in London, including representatives of leading fund and asset managers, banks and investors as part of their 2017 market-making programme. BusinessDay sat at these meetings.  BusinessDay also sat at the Q & A, which Central Bank Governor, Godwin Emefiele held with investors as part of the 2017 Africa Investors’ conference of ICBC-Standard Bank London. In this first part of our series on Looking in from outside, Publisher Frank Aigbogun who was in London provides an overview of what the investors say about Nigeria and the road it should travel.

One major take away for BusinessDay after the week long round of meetings with leading fund managers in London is that most now believe the risk of a massive devaluation of the naira has eased considerably. Some even are of the view the naira at its current rate, is perhaps, undervalued.

However, no one was willing to say precisely the level at which a revaluation of the naira will become a disincentive for investors.

The new investors and exporters foreign exchange window, I & E created by the Central Bank of Nigeria (CBN) may well help resolve the FX liquidity quagmire, which has stunted economic growth for more than two years now.

The investors and analysts from leading fund managers we met in London appear willing to give the recent changes time to prove their efficacy, even if many of the big investors continue to wait on the sidelines.

“This market”, said one investor, “is giving Nigeria a second chance and if you blow it, there will be far reaching repercussions for Nigeria.”

About $700 million of the total flow of $1.5bn into Nigeria, via this new FX window in its first two months, could be attributed to largely FPIs or the so-called portfolio managers, an early sign of promise.

However, the investors want more. They want to see more liquidity, which offers assurance of a painless exit should they begin to move huge funds into Africa’s largest economy.

They also have to contend with their compliance units who cannot understand why Nigeria retains a multiple rate system.

As one fund manager put it, “if say I do a trade at N370 to the dollar and I am asked by my compliance people why I did not use the N305 to the dollar rate, which they see on Bloomberg or Reuters terminal, what do I tell them? It appears a bit awkward.”

The investors say Nigeria must ensure that the rate fixing system on the I&E window works transparently, that the rate is market determined and officials should work with Reuters and Bloomberg to ensure that this autonomous rate, which is effectively the interbank rate, is also put out on their terminals.

For the investors, transparency is everything and while they acknowledge that there has been evidence so far, that the autonomous rate is “not” rigged, they are quick to point to the issues that arose last year, when the apex bank first announced mechanisms for a market-determined rate.

So whereas there is no big concern with the I&E window, the reticence among the big fund managers is as a result of integrity issues linked to last year’s false start.

The investors acknowledge the changes that have recently been made and welcome the onset of macro economic stability in Nigeria.

However, at meeting after another, the transparency issue is raised vigorously.

The investors understanding of simple terminologies like NAFEX and NiFEX vary from one house to the other. They use the terms to define the markets, whereas NAFEX in particular, is only the process of fixing rates on the new I & E window and after the meetings in London, Nigerian authorities may now refer to this widow simply as NAFEX.

They remain concerned that the multiple exchange rate system makes reading the real naira exchange rate rather difficult and confusing and that it is the reason why the big players have not entered the field.

“There are still some empty boxes to tick”, said a representative of a firm with nearly $500bn under management, before adding, “we are still watching and reviewing what is happening in Nigeria.”

At one of the meetings with representatives of a leading firm, there was this rather simple question of “if I want to exit at the maturity of my investment, can the CBN seize my CCI or the so-called certificate of capital importation? And when they were told this has never happened and there is no chance it will ever happen, they followed with another question, who keeps the CCI? “You” the investor, were the quick response from the FMDQ delegation.