By Emeka Anaeto,
A wave of political pressures may have forced the emergence of a new order in the nation’s foreign exchange market even as currency speculators abandon their positions with losses going up to N45 billion and more.
Inter-bank interest rates have also spiked to all time high with potent threat to other interest rates including lending.
Nigeria’s local currency, Naira, appreciated to a 14-week high of N455/USD1 yesterday in the parallel market segment of the currency market at the backdrop of a week old new foreign exchange market measures rolled out previous weekend by the Central Bank of Nigeria, CBN.
The new exchange rate erased the depreciation recorded since November 15, 2016 when the parallel market rate closed on average N456/USD1.
The appreciation trend began on Tuesday last week after initial resistance to the measure and a high point depreciation to N520/USD1. But Vanguard learnt that the apex bank forced its policy objectives through with massive injection of USDollar on both forward contract and spot market including direct retail sales.
Forward contract gulped about USD600 million while spot sales consumed about USD10 million.
Speculators abandon positions, incur over N45bn losses
As a result of the development currency speculators were said to have abandoned their short-term positions and began massive offloading of their USDollar holdings.
Vanguard enquiries at the various parallel market spots in Lagos over the weekend reveal heightened confusion as massive off-loadings were met with low patronage.
Though some of the dealers who spoke to Vanguard lamented losses, a few of them believe they would recover the losses by buying back at lower rate and selling when the depreciation resumes.
Going by recent independent report on the volume of transactions in the parallel market amounting to about USD800 million traded since February 02, 2017 when the rate breached N500/USD1, the speculators have now lost about 12.5 per cent value or USD100 million (N45.5 billion).
The value of the losses would escalate as they wait for the resumption of the depreciation trend, and the dealers said they don’t know when this will happen.
They also attributed the development to CBN’s intervention in the direct retail sales of USDollar to some categories of end-users which had reduced demand at the parallel market.
Political intrigue that forced the new market
Vanguard was reliably informed that a major political decision has been taken at the presidency level to narrow the gap between official exchange rate and the parallel market rate immediately.
The decision was considered as a middle ground between outright floatation and rigid controls CBN has been using since June last year after the official depreciation and modified inter-bank market.
A top banking industry source said the political and economic implications of the forex shortages and the embarrassing gap between the official and parallel markets forced the presidency intervention.
This led to a directive by the National Economic Council, NEC, to the CBN previous week for a more flexible forex market structure and closure of the gap between interbank and parallel market rates.
The directive, according to the source, though positive, appeared strange since President Mohammadu Buhari was known to be vehemently opposed to any measure that would put pressure on both external reserves and exchange rates.
The directive towards flexible market would obviously put pressure on the reserve if the CBN would continue to provide huge USDollar to sustain the current exchange rate trend in the parallel market.
On the other hand, the source noted that it is open knowledge that fiscal authorities, championed by the finance ministry and a faction of the presidency, have been at discord with the apex bank over its forex regime, whilst the apex bank had stuck to its gun that it was doing the best that could be done in the circumstance.
However, the latest development points to a compelled shift in position though not fully to reflect the full desire of the fiscal authority.
However, in the light of the directive from NEC, the CBN issued a new policy action on the 21st February, 2017 which is expected to increase forex allocations to retail end users.
The spread between the two rates which reached an all-time high of N215.00 previous week, consequently came down to N150.00 as at yesterday.
Interest rate spikes as forex sucks up liquidity
But the positive development in the forex market appears to be breeding unintended consequences in the money market as interest rates may have come under huge pressure.
By weekend, inter-bank rate had hit all time high of 200 per cent as banks scramble for cash to back up their foreign exchange demand.
The development, if sustained in the next few weeks, would transfer the pressures to lending rates with another round of spike to over 25 per cent on prime lending, while other categories of lending would be tending towards 35 per cent, according to bank treasurers.
Presently, prime lending hovers around 20 per cent, up from 18 per cent early last year while other lending categories averaged 30 per cent up from 25 per cent.
Forecast for this week and beyond
Foreign exchange and money market dealers are entering the week with a measure of frenzy on how the new market dynamics would play out in the short to medium term.
Some of the several factors that should ordinarily help the sustenance of the positive developments in the forex market, according to financial analysts, include the increasing external reserves, stable crude oil prices, the rebound in Nigeria’s oil production as well as the stabilisation of international oil price above USD50/ per barrel.
However, the policy implementation antecedents both of the CBN and the federal government have prompted three questions from market participants:
Is the Naira rally in the parallel market a dead cat bounce or a signal for sustainable fundamental change in sentiment?
Does the Central Bank have enough Dollar liquidity to sustain pace of interventions for commercial transactions in the interbank and retail end users?
Will the fundamental change in current account dynamics (a major determinant of long run exchange rate) encourage the CBN to relax its currency peg – a decision which could buoy capital account activities and autonomous supply of forex liquidity?
In relation to these posers, analysts at Afrinvest West Africa, a Lagos based investment house, had these to say last weekend:
“In our view, whilst the implementation of the revised forex market guideline has been greeted with much optimism, we do not believe this move can sustainably address the lingering forex liquidity challenges in the economy without relaxing forex rate peg and review of list of items ineligible for forex transactions in the parallel market.
“Personal and Business travel allowances, school fees and medical fees have been estimated to account for less than 20.0% of total forex demand in the country hence there is still a large volume of demand (particularly the 41 ineligible items) that could pressure rate at the parallel market.
“It is hard to make an exact call on direction of rate, but it is unlikely the parallel rate will breach the N500.0/US$1.00 mark again in the shorter term as a more dollar liquid CBN will not shy from further interventions.
“Yet, our medium term conviction remains that maintaining the interbank rate at current peg (without implementing deeper reforms required) will lead to deterioration in current account as more demand surfaces.”
Analysts at Nairametrics, a Lagos based financial information company, also expressed a wait-and-see sentiment.
They stated: “That the new forex policy is having the desired effect already cannot be disputed as the increased liquidity has ensured that for the first time in three weeks, the parallel market rates have dropped.
“The question now remains if as the CBN Governor, Godwin Emefiele, requested, the demand side of the forex market will also apply some discipline to its demand. If this does not happen, then one wonders for how long the CBN will be able to continue issuing $600 million weekly.
“Whilst implementation of the policy is still in early stages, speculators are off loading dollars in droves in the hope that they can buy again, when there are indications that it the depreciation will remain momentum.
“This is not the first time we are seeing a strengthening of the Naira followed by a sustained decline, after a new CBN Policy.”
In a cautious optimism analysts at Cowry Asset Management Limited, another Lagos based investment house, stated: “Given improvement in the external sector, we anticipate that the new measures could pave the way for a gradual return of confidence in the foreign exchange market, particularly for foreign portfolio investors.
“We expect that the increased direct sale of foreign exchange to banks in order to meet demand for invisibles such as travel allowances, school and medical fees would further reduce pressure at the alternative market segements, thus creating an opportunity for narrowing of exchange rate spread.
“We hope that the fiscal authorities will compliment these measures by fast tracking the plannedUSD2.3billion foreign currency loans and further stabilizing.”