Nigeria failed to take advantage of the goodwill and momentum generated by the successful elections last year by releasing its peg on the naira and sending the right signal to attract foreign investors, and today the opaqueness and fragmentation of the FX market means that investors are confused and intrigued, according to analysts.
Investors do not have to look far to know that things are not right with the Nigerian economy and its management.
Inflation at 12.8% is rising far above asset yields, including T. bills at 7%, interbank overnight rates at 4% is far below the Central Bank’s MPR of 12%; crimping credit creation, banks are reporting lower earnings and non-performing loans look set to continue to rise, as harsh market conditions weigh down on the performance of businesses operating in Nigeria.
With foreign investors said to be avoiding the country until the FX controls are removed, Nigeria’s local bonds are the only ones to have made losses this year among 31 emerging markets tracked by Bloomberg. Nigerian average yields have risen 161 basis points to 12.31 percent since the end of 2015, whereas Russia’s have fallen 26 basis points to 9.29 percent and Colombia’s 28 basis points to 7.77 percent.
The market has waited nervously for the outcome of the review of the FX market Nigeria’s Central Bank says it is conducting.
After the January MPC meeting, the Central Bank said, “in the medium term within which monetary policy is cast, the need to allow policy to produce the desired outcomes becomes a key consideration in the policy mix. Consequently, the bank is fine-tuning the framework for foreign exchange management with a view to ensuring a more effective and liquid foreign exchange market. ”
After the March meeting of the MPC, the apex bank issued a statement in which it said, “however, the Committee (MPC) charged the bank (CBN) to speed up reforms of the foreign exchange market to improve certainty and eliminate noise and opportunities for arbitrage…”
One month after, there is no word on the said review despite the urgency in the MPC statement of March.
Senior lawyers and bankers told BusinessDay they still believe the apex bank will respect relevant provisions of the foreign exchange act of 2004 that established the autonomous foreign exchange market and the rules governing its operation.
The FEA 2004 by virtue of the provision of its section 9 specifically states that “the rate at which each transaction in the Market are to be executed shall be at the rate MUTUALLY AGREED between the APPLICANT PURCHASER and the AUTHORISED DEALER or AUTHORISED BUYER concerned”.
Surprisingly, this market was frozen by a change to Order based 2-way quote market and the effective closure of CBN’s RDAS window on February 19, 2015.
The lawyers say the question of devaluation can become an issue if Nigeria operated a fixed, single exchange rate regime.
This should not apply to Nigeria where the law provides that rates on the autonomous market should be determined by the principle of a willing buyer and a willing seller.
It’s not the first time Buhari has resisted market driven policies. When he last ruled Nigeria from 1983 to 1985, a time when, like today, oil prices had just crashed, he ignored advice to adjust the naira and refused financial assistance from the Washington-based lender, the IMF.
Buhari says adjusting the value of the local currency will amount to killing the naira.
However, for investors today, such thinking makes little economic sense. Most businesses are already trading at the black-market rate since the government’s policies are choking off dollars in the official market, according to Exotix Partners LLP, a London-based investment bank focusing on frontier markets.
PZ Cussons Plc, the Manchester, U.K.-based soap maker, said last week its Nigerian unit is forced to pay a 50-70 percent premium on the official rate to source foreign-exchange.
Nigeria’s government “just doesn’t get it,” Kato Mukuru, the London-based head of equity research at Exotix Partners LLP, said in an interview. “There comes a point where you need to understand that the whole country has already devalued.”
Businessday
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