Investors losing faith in FX market say dealers

Barely three months after launching a new flexible FX trading structure with fanfare, treasury managers of banks say Nigeria’s FX market is virtually collapsed, as the local currency, the naira hit a new low of N490 to the dollar on the parallel market.
Bank treasurers tell BusinessDay senior officials of the Central Bank of Nigeria (CBN) are still influencing the setting of prices at which trades occur and that the FX market has broken down with dollar shortages worsening.
“There is no transparency, no price formation and hence no liquidity,” one FX market participant, said.
A confidential document seen by BusinessDay shows that officials of the CBN directed that the minimum tenor for currency forwards between banks and clients should be for 60 days to prevent banks trying to fill orders at a higher rate from doing 2, 4 and 7 day forwards outside of the official rate.
Another source told BusinessDay that Central Bank officials began setting the exchange rate at which licensed money transfer companies could sell naira to Nigerian banks (before it was up to the two parties to agree a price), some three weeks ago.
“Banks may not bid for dollars at a rate exceeding N315 for amounts less than $1.5 m, but on large amounts, banks are expected to call the CBN to agree on a different rate should they wish to trade higher,” a second FX market participant, told BusinessDay last night in frustration.
The naira has continued to touch new lows on the black market as the dollar shortage worsens.
On the official FMDQ OTC interbank FX market, the USD/NGN rate is close to N315 but most investors do not believe it is an actual reflection of the market price.
The naira tumbled more than five percent to another record low against the dollar, to near N490 on the black market on Thursday.
“Dollar is very scarce in the market right now because many people don’t know how low it will fall in the near term, so people are holding on to their hard currencies in order to watch the direction of the market,” one dealer said.
The continuing currency crises in Nigeria may make the current recession more prolonged and painful analysts have warned.
Economic growth in sub-Saharan Africa is likely to slip to 1.6 percent this year, its lowest level in two decades, due to continuing woes in the continent’s largest economies, Nigeria and South Africa, a World Bank report said on Thursday.
Nigeria’s economy fell into recession after contracting by 2.06 percent in the second quarter (Q2), of 2016.
“The restrictive FX regime in place has taken a toll on economic operations domestically,”Samira Mensah, associate director, Financial Institutions Ratings at Standard & Poor’s (S & P), told BusinessDay in a phone interview from Johannesburg.
“The shortage of dollars has shut down a number of operations such as manufacturing and imports and is affecting the Nigerian economy across board.”
Standard & Poor’s forecast Nigeria’s economy will contract by 1 percent in 2016 before having a timid recovery in 2017/2018.
Meanwhile, offshore funds continue to shun or underweight Nigeria as a lack of convergence between the official, bureau de change (BDC) and black market rates, continues to sap investor confidence.
The emasculation of the interbank market has elevated the black market into supremacy position in forex deals, since there is no better alternative, according to Ebenezer Babatope, a chieftain of the opposition Peoples Democratic Party (PDP), and a member of the party’s board of Trustees.
“Where is the President and who are those in his team deceiving him by telling us Nigeria will soon get out of recession? How can Nigeria be out of recession soon when $1 is N500 in the black market? How can they be making such a statement when hunger in the land has entered unprecedented levels? Nigerians are suffering. Businesses are folding up under President Muhammadu Buhari’s administration,” Babatope said in a telephone interview with BusinessDay.
He added, “as a matter of National Economic Emergency, President Buhari should agree he has got no clue on economic matters and humbly ask for the help of Ngozi Okonjo Iweala’s, the Pat Utomis, and the Kaku Idika Kalus, who are all professionals. I said it before, that Okonjo -Iweala is not a PDP member. She was a professional invited to do a professional job. She can be invited again for a rescue mission.”
Low prices for oil, Nigeria’s top foreign currency earner, have drained the country’s forex reserves, which hit an 11-year-low of $24.61 billion on Tuesday.
The CBN had hoped for a gradual return of investors after re-launching the interbank foreign exchange market which allowed for the floating of the naira in June and introduction of naira settled futures trade in USD.
There was however a net outflow from Nigeria of $538 million between July and August, 2016, according to data from the CBN.
Analysts and traders expect the exchange rate to blow past the N500 per dollar mark in a fortnight unless market based reforms of the FX market are adhered to, which will discourage arbitrage and speculation.
Traders from neighbouring countries and some importers have been mopping up dollars and putting pressure on the naira in a possible speculative bid, Aminu Gwadabe, president of the association of bureau de change operators said in a television interview with broadcaster CNBC.
Brent crude traded at $48.10 yesterday, after rising 5.9 percent on Wednesday, the most since April, on OPEC members, including Nigeria, agreeing in Algeria to reduce production to a range of 32.5 million to 33 million barrels a day.
While most oil producer currencies rallied on the deal, the Nigerian naira tanked yesterday, a signal that the market is yet to trade freely on fundamentals.
“Further weakening of the naira to the dollar would definitely hold down growth. This would imply a sharp cut in production/business and perhaps elevated inflation level making a conundrum with seemingly almost no way out,” said Abiodun Keripe, Head of Research and Strategy at Elixir Investment Partners Limited.
“Hopefully, the FX condition would improve a bit with expected dollar inflows from the planned Eurobond issuance, African Development Bank and other sources begin to trickle in.”