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Avid foreign investors seek clarification on naira

By BusinessNews Staff on June 25, 2015

Foreign portfolio investors that are eager to play in Nigeria’s fixed income securities market following the country’s successful political transition would like to see a higher and more sustainable exchange rate equilibrium as well as a move back to a price-driven forex trading platform.
The foreign investors are also concerned that the Central Bank of Nigeria (CBN) may further devalue the naira.
Analysts predicted a further devaluation of naira in order to reflect what they described as the $4.5 billion fall in Nigeria’s forex reserves. They also ruled out the likelihood of easing monetary policy this year.
Nigeria’s forex reserves stood at $29 billion as at last Thursday. The CBN had in February devalued the naira and also scrapped the Retail Dutch Auction System (RDAS) of the forex market. At the last monetary policy committee meeting the cash reserves requirements for both public and private sector deposits were harmonised at 31 per cent.
But speaking on the expectations of foreign investors following a recent meeting between the central bank and forex dealers, in an exclusive chat with THISDAY, London-based Fixed Income, Currencies and Commodities (FICC) analyst for Africa at Standard Chartered Bank, Samir Gadio said: “International investors are eager to come back to the Nigerian debt market, but the main constraint remains the exchange rate level. The overwhelming majority of portfolio investors would like to see a higher and more sustainable exchange rate equilibrium as well as a move back to a price-driven forex trading platform.
“Their fear is that if they invest in local bonds or bills now, there is a high risk that their returns will erode when the currency is devalued further.”
He also pointed out that another constraint was that dollar-naira non-deliverable forward implied yields were generally higher offshore than in the onshore fixed income market.
“So even if some investors wanted to go long NGN in very short-dated tenors, they may have more incentive to do it in the offshore derivative market at this stage,” Gadio added.
Nonetheless, a source at the meeting between the central bank and authorised dealers last weekend disclosed that the regulator was advised to remove restrictions in the foreign exchange market so as to strengthen liquidity in the market.
According to the source who pleaded to remain anonymous, the dealers also urged the central bank to ensure stability both on the demand and supply segments of the market. He said the dealers argued that the central bank’s policy was “holding the naira down and restricting inflow.”
On the other hand, the source said the “CBN was concerned about the external reserves depletion and expressed its desire to see an accretion of the reserves in the next few months. It also said a lot of the banks have not been supportive of its actions and threatened to punish any bank.”
Analysts at Renaissance Capital Limited pointed out in a recent report that given the revenue constraint facing the country, the Buhari’s government “will continue to wind down some companies’ pioneer status, so they can start paying taxes, and reduce the number of authorities that can grant pioneer status, to slow the awarding of tax exemptions.”
They had also argued that the naira, which has essentially been pegged around N199/$1 since the mid-February devaluation, would be devalued further.
“The central bank is likely to move back toward a managed float versus the managed peg of recent months. A weaker naira implies a build-up of inflationary pressures. We see inflation breaching the central bank’s inflation target band of six to nine per cent and entering double-digits in the third quarter of 2015,” they added.

[ThisDay]

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