The upward review of banks’ foreign exchange for trading, the Net Open Position, (NOP) from 0.1 to 0.5 by the Central Bank of Nigeria (CBN) Wednesday, may improve the liquidity position of the foreign exchange market and enhance her global business index among emerging markets, BusinessDay investigations have shown.
Also, the upward review of their net foreign exchange trading position may have justified analysts’ expectation of the need to increase banks’ allowable trading position to provide sufficient liquidity within the FX market.
The position may be hastened by the new FMDA requirement, limiting the movement in naira to 2 percent a day, from the 3 percent previously. The Foreign Exchange traders had reached an agreement that if the naira depreciated 2 percent on any one day, at that point the market closes for that day and stops trading.
Already, dealers said this policy raises the potential FX liquidity in the interbank market to some $100 million; a level which analysts believe should douse speculative tendencies and rationing effect of weak liquidity.
Godwin Emefiele, CBN governor is said to be worried by the recent negative watch placed on the market by the New York based global financial services firm, JPMorgan, occasioned by the illiquidity of the market among others.
While Emefiele is said to be exploring ways of engaging them, so as to ensure that Nigerian bonds remain on their GBI-EM, the forex dealers, under the aegis of FMDA on Wednesday had a “closed door” meeting in Lagos to discuss liquidity in the FX and bond markets.
They have also resolved to engage with the CBN and other stakeholders to ensure adequate liquidity for the FX trading.
Nigeria accounts for 1.8 percent of the $287 billion linked to the Global Business Index-Emerging market, (GBI – EM).
Read also: Banks face rates headwind as liquidity surge lacks outlet
Business- Day gathered that domestic FX turnover was around $300 – 500 mn a day, when the foreign exchange trading position for banks was 1 percent of shareholder funds, but currently trading with between $20 to $30 million daily. The exchange rate went to about N190/$ on Wednesday.
But analysts who spoke with Business Day last night, said that the liquidity of the market has improved to over $70 million and that they are still expecting more improvement.
“It will boost participation in naira fixed income market and marginally reduce yields across the curve”, said Kayode Tinuoye, team lead, research, at United Capital plc, adding that the CBN must have directly responded to foreign investors’ apprehension about the low level of liquidity in the interbank market.
“In order to remain in the GBI-EM index, Nigeria would need to demonstrate that liquidity in the interbank FX market is at an adequate level,” says Razia Khan, managing director, head, Africa Macro Global Research, Standard Bank, London.
Commenting further, Khan said, “In an environment of still-pressured oil prices, it probably isn’t going to ‘bring respite’ to the market. However, it should help to restore at least some liquidity to the FX market. I believe the new FMDA requirement, limiting the move in the NGN to 2% a day (from 3% previously) is still in place. So it’s uncertain whether really large trades will still be able to go through all in one go, and this might still have an impact on Nigeria’s index inclusion.”
“We expect the spread between the interbank and parallel market to widen further, given the restriction on the use of rDAS and interbank funds solely for Letters of Credit, Bills Collection and other invisible transactions, which meet documentation requirements,” said research analysts at Associated Discount House Limited.
“We believe this regulation will limit the frontloading of FX demand by importers and moderate the growth of FX deposits (domiciliary deposits have grown 33% to N4.5 trillion or approximately 20% of total banking sector deposits)”, the analysts said.
Analysts also see this policy affecting yields on Nigerian bonds, said to be the highest in the emerging market index space.
“We believe the increased net open trading position (NOTP) will increase FX liquidity in the interbank market and improve foreign investors’ appetite for Nigerian Sovereign Notes (both treasury bills and bonds). The yield curve may ease some 25 basis points today, especially as the system remains liquid, on the back of FAAC disbursement,” the analysts added.
“We expect this development to provide some capital (and profit) repatriation comfort to foreign investors, even so the election risk and macroeconomic uncertainties will subdue foreign portfolio flows into the country”, said analysts at Associated Discount House.
Already, analysts say OMO auctions and other withdrawals from the system will douse investor appetite in the week ahead, noting that they will take profit by selling into the strength of the market today, with expectation of covering back positions in the week ahead, when tight moderated liquidity in the money market may trigger a sell-off on treasury bills and bonds.
