Confidence Inching Back to Nigerian Market, Forex Liquidity Improves

The decision by the Central Bank of Nigeria (CBN) to move towards a full free float of the naira, coupled with its roadshow in the United Kingdom and United States of America last month, is gradually yielding results as there was a perceptible improvement in liquidity on the interbank spot FX market last week, recording a turnover of $196.14 million, with an average daily volume of $39.23 million between July 25 and 29.

Market analysts who spoke to THISDAY on the development, confirmed that the improvement in turnover signalled growing liquidity in the official FX market on the back of growing investor confidence.

One bank treasurer, who preferred not to be named, said the average rate of the naira during five days of trading last week stood at N318.81 to the dollar, adding: “It is noteworthy that the CBN’s contribution to the market was only three per cent of the total volume that was traded.”

Yesterday, the naira exchange rate appreciated marginally on the interbank market to N316.37 to the dollar, stronger than the N321.16 at which it closed last Friday.

Indeed, analysts said they expected the naira to make more gains against the dollar on the interbank market, as bureau de change operators prepare to start trading FX in the next few days.
However, on the parallel market, the naira depreciated to N381 to a dollar at the close of business yesterday, down from the N378 to a dollar last Friday.

A CBN top official, who also confirmed that there was a gradual improvement in market liquidity, attributed it to the decision by the central bank to truly float the currency, as well as the roadshow in the UK and US, saying both helped to restore confidence among some investors who had been sitting on the sidelines.

Lending more insight into the roadshow, he said the CBN governor, Godwin Emefiele, and his team met with over 140 investors in London, 10 in Los Angeles, about 50 in Boston and close to 90 in New York, where they were “all enthusiastic to receive the governor and other members of his team, given their interest in Nigeria”.

“With the clarity provided, they were more amenable and willing to resume trading in naira in a few weeks or months from now.

“Some of them are already undertaking market risk evaluations on making forays in our market, which is indicative of increasing interest in Nigerian bonds and other instruments,” he said.
He also revealed that this was already evident in the OTC FX futures contracts which had already attracted $300 million-$400 million since trading on FX futures started about a month ago.

Another investment analyst who works for a foreign investment firm in the country also described recent events on the interbank FX market as a positive sign of things to come as long as “the central bank continues to do the right thing”.

He said: “With the hike in the MPR last week and other measures taken to date, we are aware that foreign investors who had been on the sidelines have started to get approvals to start trading in naira.

“However, the CBN should be ready to intervene in the market in the event of any shock, and clear any backlog of forex demand in the market to continue to rebuild confidence.

“Also, it should ensure that there is no preferential treatment of any investor; in other words, access to the market must be fairly uniform across the board for all investors.”

He, however, acknowledged that most of the issues had been addressed with the implementation of a single FX market, but cautioned that the central bank would still need to work towards improving reporting by Nigerian banks with respect to their exposure to oil and gas sector loans.

“Concerns still remain over banks’ exposure to the oil and gas sector, so the CBN needs to undertake a stress test and publish its findings like the European central bank.

“This should not be seen as a punitive measure, but as way of enhancing transparency on the financial stability of Nigerian banks through which investors move their funds.

“The absence of clarity on the standing of banks could also deter investors, so it is high time the CBN begins to publish the findings of its stress tests to eliminate any uncertainty that may remain in the market,” he explained.

He further added that the only major obstacle left for the full removal of capital controls remained the continuing ban on 41 items from accessing the interbank FX market, which he blamed for the wide disparity between the parallel and official market rates.

“For the CBN to achieve convergence, it needs to lift the ban on the 41 items, as this is not a monetary policy issue. Instead, the fiscal authorities should be allowed to step in by imposing measures to discourage the importation of these items through higher import duties and other measures that would encourage local manufacturers to produce the items locally.

“As long as the central banks retains the restriction, the wide disparity between the interbank and parallel markets will remain, so if it wants to achieve convergence, it must rethink its policy,” he said.