Nigeria: Mixed feelings on Naira rate as market opens today

*Counting the Naira.

*Counting the Naira.

•Traders speculate Naira trading at 270 per dollar
•Import-dependent businesses will suffer as inflation head towards 20%
•Hard times await consumers as economy contracts
•Need to review forex ban on 41 items; foreign investors adopt wait & see

20 June 2016, Lagos — Mixed reactions have trailed CBN’s announcement on Wednesday of a flexible exchange rate in the foreign exchange market. While some foreign investors are keeping sealed lips, others are saying they will wait and see the level of the exchange rate depreciation before venturing into the Nigeria market.

However, local investors are cautious in their reactions stating that the economy was held down by government control for too long.

Professor Chris Analo, Registrar/Chief Executive Officer, Institute of Credit Administration said that the move by the CBN is a bold step in the right direction. He said the economy should be freed and the invisible hand of supply and demand should be allowed to allocate resources.

The flexible exchange rate, he said, would help determine the true value of the naira. Dr. Frank Jacobs, President of Manufacturers Association of Nigeria, MAN, described the new foreign exchange policy as a step in the right direction.

In a telephone chat, he said: “I am not speaking for MAN as a body at this time because we are meeting this week to know how it will affect manufacturers generally” He continued: “My personal voice on the policy is that if we allow market forces to determine the price of the naira, it will be better in the long run. Also, there won’t be fluctuations of the naira as we have been having in recent times.”

For Mudal Yusuf, Director-General, Lagos Chamber of Commerce and Industry, “The move is quite commendable. It is a position that the Organised Private Sector (OPS) has canvassed over the past one and half years.” According to him, Nigerians should expect the following benefits from the policy: “Improved liquidity in the foreign exchange market which would boost investors’ confidence; there will be a significant improvement in the allocative efficiency of foreign exchange; supply of foreign exchange to the foreign exchange market will be enhanced as confidence improves, especially from capital importation, export proceeds and diaspora remittances.”

Continuing, the Lagos Chamber of Commerce and Industry boss said: “There will be considerable moderation in exchange rate as supply of foreign exchange improves; the federation account will benefit from better revenue inflows from the CBN as sale of subsidised foreign exchange comes to an end and that the policy is a major incentive to exporters as they will have unfettered access to their export proceeds.”

However, he said that “there is need for the CBN to review its position on this for the following reasons: Many of the items on the list are inputs for industries; many industries are being currently impacted adversely; the exclusion has led to considerable loss of jobs in industries, distributive trade sector and maritime sector; it has led to considerable loss of customs revenue, which has impacted negatively on the federation account and fiscal viability of governments at all levels and that the phenomenon of smuggling may be aggravated in respect of some of the excluded items.

The Chairman, Progressive Shareholders Association of Nigeria, PSAN, Mr. Boniface Okezie in his view said: “The flexible exchange rate in my own view, will fuel inflation as there is likely going to be sharp fall of the value of Naira. We should note that Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy and also lift inflation.

So, the major likely effect is that we will have a weaker naira because we are still an import-dependent nation. So, in the short run, the effect would be enormous as this might not be good for our manufacturers who still import their raw materials.

But, in the long run, it will be better if other impediments are also addressed simultaneously. In the case of portfolio investment, more foreign investors would want to bring their dollar to invest, make a profit and repatriate to their own country. This is because, the dollar will have a higher value than naira and once they make their money, convert them to the dollar, they will repatriate to their home country.

The local investors would be the worst hit because they are the real investors whose returns would be eaten up by inflation. Furthermore, local investors at the moment don’t have money to invest because there is no flow of funds in the economy. Contractors are being owed, high unemployment, difficult operating environment, etc. are constraints to local investors.

However, if the flexible exchange can favour the real sector, it will be better for the country.” Speaking on the issue, Managing Director, Securities Africa Limited, Mr. Afolabi Folayan said: “The stock market initially opened on a high note as investors anticipated the CBN’s guideline but dipped at mid-day before closing bullish subsequent to the Press briefing of the CBN Governor on Wednesday.

I believe the changes have been expected by the market since the last Monetary Policy Committee, MPC meeting and the effect has already been priced into equity prices over the past few weeks. The effect of the new foreign exchange policy has been minimal. I expect the prices of stocks to go up for some days and stabilise thereafter. Most stakeholders are yet to understand the workings of the new guideline.

So, from next week when the policy will kick off, we would begin to see greater reactions in the market. My fear is the inflation that this policy will create but if it can be managed effectively by the apex bank, it will be better for the country.”

The Managing Director, APT Securities & Funds Limited, Mr. Kasimu Garba Kurfi in his reaction said: “The new foreign exchange policy is good for the stock market and economy in general. It will bring foreign investors into the market and more activities are expected in the near future as the market already had gained over 3 percent in two consecutive trading days.”

Managing Director, Capital Bancorp Plc, Mr. Aigboje Higo in his comment said: “The new foreign exchange policy is a bold initiative and very positive for the stock market. We expect the bullish sentiment to be sustained in the sessions ahead as domestic investors position in advance of the official take-off of the liberalised foreign exchange market on Monday which is expected to attract portfolio investors.

“Whilst we view the new development in the foreign exchange market as positive in aiding price discovery in the foreign exchange market, as well as reducing pressures on public finances and the external reserves; the caveat on maintaining the list of “banned”41 items will continue to make the parallel market thrive. Nevertheless, the moderation in FX risk, which hitherto had been obscuring the valuation of assets in the economy, will unlock more value for equity investors, especially in Banking and Consumer Goods counters. Foreign investors who were put off by the capital controls needed to defend the naira bonds and stocks are on their part adopting a wait and see attitude.

Tajudeen Ibrahim, head of Equity Research at Chapel Hill Denham Securities Ltd said: “While they haven’t yet returned, locals have been buying equities expecting that they will soon return. Local investors are positive about the central bank’s move, believing it will boost dollar liquidity. They believe that at some point, foreign investors will come back to the market. It’s unlikely to happen very soon. It may take a couple of weeks before they are comfortable with the new foreign-exchange system.”

Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank in Johannesburg in his reaction said: “A free float was one option we did not see coming; it is definitely a step in the right direction. It is long overdue and it will go a long way toward an economic re-balancing. But it is just the first step.”

A free-floating and weaker Naira won’t be just good news. It may also fuel inflation, already at a six-year high, and force the Central Bank to raise borrowing costs, hurting those who can least afford it; the poor.

“The economy is going to struggle for the rest of the year partly owing to the delay in implementing a floating exchange rate,” said Adewale Okunrinboye, an analyst at Asset & Resource Management Company. “The nation has suffered from the delay. Prices are going to come under pressure.”

Reacting to the introduction of a flexible exchange rate by the CBN, Yvonne Mhango; Sub-Saharan Africa (SSA) Economist at Renaissance Capital said: “Nigeria will float the naira on the inter-bank foreign exchange market when trading begins today, 20 June, in a single market structure. This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate.”

Where will the market put the naira?
“When we said ‘we see Nigeria’s foreign exchange policy becoming more flexible, possibly as soon as mid-2016’ in our 22 April 2016 note, we never imagined a free-floating naira. Now the question is where the market will put the Nigerian naira. We look to the Kazakh tenge for some guidance. Investors draw parallels between it and the naira because they are both oil-exporting currencies, and have followed similar trajectories – at least until August 2015, when Kazakhstan floated the tenge, which resulted in it depreciating by almost 30 per cent against the US dollar, over a couple of days.

“If the naira were to mimic that move today, when trading begins, we could see the foreign exchange rate at N260/$1, which is close to our fair value estimate of N255/$1. It is likely the central bank will anchor the foreign exchange market by setting the opening rate on 20 June. However, this would just be the start. It took over six months for the KZT to fall to its low, representing an additional 50 percent fall. If the naira follows this path, we may see the exchange rate fall to N390/$1 by year end 2016, before retracing.”

Energy Stakeholders call for caution
Stakeholders in the energy sector of the economy appear to be cautious about the new flexible foreign exchange policy. They all agreed that effective implementation of the policy will no doubt have an impact on the sector. Mike Osatuyi, National Coordinator, Independent Petroleum Marketers Association of Nigeria, IPMAN said: “Caution is the word. Let us wait and see how it will be implemented. Let us wait for at least two weeks before making statements.

However, I see much inflow of foreign exchange from companies and individuals. If there is a high volume of foreign exchange inflow, it means that much Naira will be chasing dollars. In other words, dollars will be available to marketers and other dealers in the petroleum sector, unlike before, when dollar scarcity tried to stifle importation of products. The next two weeks will determine the level of impact the new policy will have on the downstream sub-sector.”

Godwin Idemudia, General Manager, Public Affairs, Eko Electricity Distribution Company said: “It is too early to speculate. I think we need to study and digest the policy first to know the direction of events. The policy is just about forty-eight hours old and it is felt that the situation needs to be properly studied before we can determine the direction of things. It may therefore not be okay to start presuming what the outcome of the new policy would be when it has not even been tested for a week. One may only add that the impact of the state of the national economy has not just started with the new policy.”

Sunday Oduntan, Executive Director, Association of Nigerian Electricity Distributors, ANED, said: “I can only put it in a simple form. Anytime the Naira is devalued, it will affect the power sector. If the Naira continues to be devalued, it will continue to affect the sector because most of the power sector components are imported.

*Omoh Gabriel, Peter Egwuatu, Sebastine Obasi & Ediri Ejoh – Vanguard

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