Investors fear Nigeria’s FX market going back to dark days of 2016

Foreign exchange rates are galloping again in Nigeria. Dealers are speaking in hushed tone afraid of regulatory sanction.  Unmet demands are piling up and manufacturers are raising alarm. Nigeria’s foreign exchange market is virtually frozen. It is a playback to the dark days of 2016 and early 2017 when it is alleged, the market was being rigged.

As was the case then, there’s now anxiety among foreign investors in Nigeria that the country may be creeping back to the days of acute dollar shortages and central bank capital controls that deterred investment and marred the economy.

The fall in oil prices means the central bank of Africa’s largest oil producer has run low on dollars and is struggling to meet FX demand, forcing it to resort to demand management tactics from 2016 with little success.

Bankers say there is a foreign exchange demand backlog of around $1.5 billion currently. That’s up from the $1 billion estimated a month ago. Sources say regulators are now resorting to pressuring banks on FX quotes to submit in attempts to ration scarce dollars.

“It would appear Nigeria is losing some of the FX market credibility gains since 2017 as there are signs the market is being rigged again,” one investor familiar with the matter said on condition of anonymity.
“How can the futures rate move by near N150, yet the naira spot did not move by a single naira?

Meanwhile banks are pressured on what quotes to submit,” the person said.

In 2016, some $7 billion of foreign exchange bids went unmet at the height of a crippling FX crisis that was also triggered by a fall in oil prices and made worse by the CBN’s capital control measures.

The crisis dissipated after the CBN weakened the official rate by 40 percent and created a special market-driven window for investors and exporters in 2017 which helped to somewhat restore investor confidence in the country’s FX market.

Four years since the crisis of 2016 and Nigeria seems to be drifting towards those dark days yet again. While there’s an FX demand backlog piling, the naira has crashed to a near three-year low of N460 per dollar at the black market and the forwards market is flashing signs that investors see the naira falling to as low as N510 in a year’s time.

The plunge in the black market rate, in particular, creates all sorts of problems for the central bank in its bid to force a convergence of the country’s multiple exchange rates, as the plunge is an indication the central bank may have to weaken the official rate further after the devaluation in March.

“There is a significant locking up of the dollar-naira market that will last until those holding dollars see a closing of the gap with the perceived true value of the local currency,” said Yann Alix, a partner at Ashurst in London, who sees the need for a fall to at least N400 to N420 to the dollar.

“The rate of 380 does not appear to have made any material impact on the severe liquidity issues faced in Nigeria for entities requiring dollars,” Alix said.

“Nigeria’s measures to date are not going to be sufficient and there is a concern that the government needs to be more responsive to the combined issues of crude-oil price fall and COVID-19,” he said in an article published by The Africa Report.

The central bank in March weakened the official rate to N360 per dollar from N306, and the parallel market rate was moved to N380 from N360. It called the move an “adjustment” rather than a devaluation.

“The naira hasn’t found its real exchange rate value” in the COVID-19 world, said Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos. “There is a scarcity of foreign exchange which is beyond the control of the authorities in the short term.”

The naira devaluation was less than other commodity producers from Russia to Colombia whose currencies, the ruble and peso, are down by 17 percent and 19 percent, respectively, since the beginning of this year. In Nigeria, crude accounts for 90 percent of foreign-exchange earnings and reserves are down 12 percent since January to $33.6 billion.

“If the price of oil is down by more than 50 percent since the beginning of the year, then it makes sense that the naira should typically weaken more than it has now,” said Wale Okunrinboye, head of investment research at Sigma Pensions.

Corporates bid black market rate higher

The current backlog in the market has forced some manufacturers and importers to source dollars at the black market, pushing the exchange rate to new highs.

As of May 21, a dollar sold for a record N460 at the black market, according to data from abokifx, a website that tracks daily movements in the unofficial exchange rate. That’s up 28 percent from March.

That means the spread between the unofficial black-market rate and the official rate of N360 now sits at N100, while the Investors and Exporters’ window rate at N383 varies from the black-market rate by N77.
Meanwhile, 12-month naira forwards are trading at around N510 per dollar, suggesting investors see the currency falling to around that level in a year.

Godwin Emefiele, the central bank governor, has since called an emergency virtual meeting with corporates asking manufacturers and importers to stop patronising the black market and urged patience while promising the CBN would meet all of their demands in no time. But there’s little confidence in the CBN’s FX firepower at a time when external reserves are dwindling and oil prices have slumped.

Though oil prices have improved in recent days, with Brent crude climbing to a one-month high of $34 per barrel, only Eurobond investors have grown more risk appetite towards Nigeria as they have across other emerging markets.

Yields on Nigeria’s dollar bonds maturing in 2047 fell from an all-time high of 13.2 percent on March 19 to 9.1 percent on Wednesday.