Foreign investors are holding off on new investments into Nigeria until the naira finds some stability.
A fresh inflow of around $700 million was expected to come but that has now been suspended as investors grow cold feet and fear losses piling over the naira volatility.
“Foreign investors that thought the peak of the exchange rate would be N1,550/$ and came in have now picked mark-to-market losses on the currency,” a source familiar with the matter told BusinessDay.
“They are touching their stop losses and are reversing their inflows. And we don’t have the liquidity to support that,” the source said.
Over a billion dollars of foreign inflows greased the foreign exchange market two weeks ago after the Central Bank of Nigeria (CBN) began to push through long-awaited pending reforms in the market.
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The reforms, which included more transparent pricing of the dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) and higher interest rates on treasury bills, attracted dollar inflows and helped stabilise the naira after a period of turbulence.
But it wouldn’t last as the currency resumed its free-fall last week, closing at a new low of N1,665.50 per US dollar at the official market.
It however started to pare some of its losses in the parallel market towards the end of the week, appreciating to close on Friday at N1800/$, after weakening to as low as N1900/$.
“They set up stop losses at $/N1,700-1,800. There was no hedge because they didn’t think the naira would weaken so much but with the alternative market touching $/N1,900 last week, they are nervous already,” another source familiar with the matter said.
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“We can’t afford them asking for their dollars now, it might be better to provide a Non-Deliverable Forward (NDF) for them so that they can hedge against any future volatility,” the source said.
Reinstating the 13-month NDFs for foreign investors, a weekly offer of one-year Treasury Bills- with the offer size published ahead of auction to aid planning- and the consistent intervention of the CBN via dollar sales in the NAFEM are all considered necessary to improve liquidity in the market and allay the fears of investors.
The CBN started selling dollars in the spot market on February 13 after a five-month break with the sale of $87 million to banks. The bank has sold more dollars since then but there has been no pattern to the sale and analysts say the amount being sold has been too little.
“What is very important going forward is for us to see an increase in supply,” said Tajudeen Ibrahim, director, research and strategy at Lagos-based investment bank Chapel Hill Denham.
“The CBN was in the market again last week to sell about $85 million to the participating banks at the official market. That kind of development is encouraging, but it is not enough to stabilise the currency,” Ibrahim said.
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The CBN’s latest intervention pales in comparison to the amount it sold daily in the market last year.
The apex bank had frozen dollar sales in the spot market to deal with a gaping FX backlog that deterred foreign investors from bringing in new money into the economy.
CBN Governor Olayemi Cardoso put the dollars owed by the central bank in forward contracts alone at $2.2 billion in an interview last month and vowed to settle it in good time.
The CBN’s intervention in the market was the latest in a long list of moves aimed at boosting liquidity in the FX market and holding the rates in the official and black market from flying apart like they did after the naira was first allowed to trade freely against the dollar last June.
In addition to introducing better transparency around pricing in the official market and increasing market interest rates, the CBN also asked banks to offload excess dollars and removed the cap on transactions done by International Money Transfer Operators lure in diaspora dollars.
Sources however say weak enforcement has muted the full gains of the new regulation around the net open position of banks which was supposed to see them offload excess dollars in their vaults.
“That move was supposed to offload over $5 billion into the market but it hasn’t happened because there are still concerns about enforcement,” a source familiar with the matter said.
The reforms had led to an initial appreciation in the naira before a renewed dollar shortage wiped the gains, with the gap between the official and parallel market rates now over 10 percent having collapsed to 2 percent on the back of the reforms.
Stabilising the naira will take higher interest rates, according to several analysts who spoke to BusinessDay ahead of a crucial Monetary Policy Committee meeting on Monday and Tuesday.
The expectation is for a 300 basis points hike in benchmark interest rates as the CBN attempts to send a signal of monetary tightening in order to curb accelerating inflation. Headline inflation hit 29.9 percent in January, according to the National Bureau of Statistics.
“What the government and the Central Bank should be doing is to allow for elevated interest rates on naira denominated assets, such as the Nigerian local bonds and the Nigerian Treasury Bills,” Ibrahim said.
Market rates are starting to rise with the one-year Treasury bill now yielding 23 percent while seven and ten-year bonds sold at a rate of around 19 percent at an auction last week.
Some investors who spoke to BusinessDay say market rates need to be north of 20 percent at the minimum across all asset classes to encourage new dollar inflows.
But there are still questions around the naira which several foreign investors will be looking to get answers to during a foreign portfolio investor call with CBN governor Cardoso hosted by the NGX this Wednesday.
The call which will happen at 4pm is supported by Standard Bank, Citi bank, JP Morgan and Standard Chartered.
“There also needs to be a concerted effort to court investors,” a senior banking source said.
“We cannot assume they will come. To be fair, most people think what the CBN has done are positive, but they were neither sequenced nor coordinated,” the source said.
