The naira is in free fall once again after a $3 billion loan secured by state-oil company NNPCL that was supposed to inject much-needed dollar liquidity into the foreign exchange market appears to be stalling.
After exchanging for N850 per USD, up from N910/$ in street trading within two days of the NNPCL’s announcing the loan deal on August 16, the naira exchanged for a new-low of N920 per USD Wednesday August 29, according to data obtained from multiple street traders.
Sources familiar with the $3 billion loan deal say it’s now on ice after investors who were supposed to make up the balance of the syndicated loan have now got cold feet, leaving only the African Export-Import (Afrexim) bank which can not single-handedly provide all the cash.
The reason for the sudden change of heart has been linked to the country’s worsening finances and apparent desperation to defend the naira.
“Afrexim bank has too much exposure to Nigeria and has reached its single obligor limit & can’t do it alone,” a source familiar with the deal told BusinessDay.
“NNPC is too big a risk so Afrexim bank can’t close the deal without some other investors,” said another source familiar with the deal but not allowed to speak publicly.
It has been two weeks since the deal was first announced and the market has run out of waiting time. There has been zero accretion to the country’s external reserves since then and most importantly, the CBN’s dollar supply remains thin.
Uncertainty over CBN governor undermines reforms
While the loan deal drags, the naira is taking a beating with the situation threatening to get worse as Nigeria muddles through without a substantive CBN governor to calm the storm.
Some investors, who see the lack of a substantive CBN governor as a more pressing problem for the naira than the stalling $3 billion loan deal, say Nigeria needs a CBN governor who will waste no time in articulating a new strategy for fx management in the country especially after the bold move to “liberalize” the market in June.
Since the suspension and subsequent detention of CBN governor Godwin Emefiele in June, Folashodun Shonubi, deputy governor, Operations at the apex bank, has been named acting governor but there’s uncertainty around whether he keeps the job long term or if he’s only a placeholder.
“The CBN has successfully removed the extreme overvaluation of the naira – but has yet to outline a new strategy for the future,” said Charles Robertson, head of macro strategy at FIM Partners.
“Developing a new strategy requires the backing of good research, a united monetary policy council and a new governor to explain what the new policy option is and how it will work in practice. We’re not there yet,” Roberston said.
Nigeria took global investors by surprise when in June it made its most ambitious FX liberalization move since 1999.
The CBN said it would now allow banks to trade the currency freely at market determined rates in a departure from the previous practice under Emefiele where the apex bank set an artificial price for dollars. Emefiele stuck to his guns even when the rate became meaningless to large segments of the economy with everyone from importers to manufacturers sourcing dollars at an almost 50 percent premium in the black market.
Nigeria has however let that bold reform go to waste so far. While still a commendable move and an important departure from the past, much has now gone wrong operationally since then, according to Razia Khan, Managing Director, Chief Economist, Africa and Middle East at Standard Chartered Bank.
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“What is urgently needed is price discovery on Nigeria’s official foreign exchange market, in order to allow the reforms to really work,” Khan said in an emailed response to BusinessDay.
“We have seen some encouraging signs: the authorities willingness to re-start OMOs, the re-set higher of domestic market interest rates. But even these reforms do not go far enough until there is a functioning official FX market,” Khan said.
The gap between the official and parallel market rate is widening again and is close to 20 percent in a swift turn of events that initially saw the gap narrow in the early days after the reform in June.
For Khan, the only way to get rid of the parallel market is to allow for the official exchange rate to be more market-driven. That would entail first allowing all autonomous supply of FX -including from oil companies – to come to the market and allowing for freer price setting to restore confidence in the functioning of the market.
“Without the second reform in particular, everything achieved so far will be put at risk – for very little gain,” Khan said.
Citigroup Inc expects Nigeria to see greater foreign investment flows in the wake of reforms to its currency but also admitted that the importance of some critical next steps.
“Countries where we’ve seen significant FX adjustments are clear winners from an investment perspective,” George Asante, Citi’s head of markets for Sub-Saharan Africa, said in an interview with Bloomberg.
“The next task for the government is to make sure the official FX market can function smoothly in the wake of the changes,” he said.
“I believe that this will be a significant catalyst for flows back into the Nigerian market,” Asante said.
Nigeria’s naira is the worst-performing African currency this year, slumping more than 40% against the dollar.
Despite allowing its currency to weaken by a record, Nigeria’s exchange rate market remains fragmented and that threatens to scuttle the gains of the initial reforms.
Since the adjustment of USD/NGN at the Investors and Exporters window (now renamed Nigeria Foreign Exchange Market – NFEX) in June, interbank FX liquidity has not improved as much as anticipated, partly due to the re-introduction of de-facto controls limiting local trades above 800 and loose monetary policy conditions, analysts at U.S. based bank, JP Morgan said in a note to clients.
Also, the CBN continues to intervene in small amounts at a rate around 740-750, without clearing the backlog of unmet FX demand.
The bank is said to have intervened late Wednesday, selling an estimated $100 million to some banks. Traders expect the sale to lift the naira today but also admit it’s only a temporary measure.
“You need someone who can make big decisions,” a senior Nigerian investment banker said about an apparent leadership gap at the CBN.
“The current lot will run a holding operation until a substantive governor is named and leaves the door open to uncertainty,” the banker said.