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DEVALUATION FEVER: Portfolio investors pull-out

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 CBN steps up interventions
Analysts call for gradual currency adjustment

By Babajide Komolafe

LAGOS, NIGERIA – JULY 15: Nigerian Naira, NGN is counted in an exchange office on July 15, 2008 in Lagos, Nigeria. (Photo by Dan Kitwood/Getty Images)

Driven by fears of a likely devaluation of the local currency, the Naira, at the backdrop last week’s crash in oil price foreign portfolio investors (FPIs), last week, ramped up their exit from the fixed income market with massive sell-off of their holdings in the Nigerian Treasury Bills, NTBs, and bonds.
Price of the Nigeria’s Bonny Light crude oil grade (Nigeria’s key revenue and foreign exchange source) dropped to $33.15 per barrel on Friday from peak $72.18 in January, threatening the country’s 2020 budget funding as well as meeting demands for foreign exchange by importers and foreign investors.

In spite of the assurances of continued dollar supply by the Central Bank of Nigeria (CBN), investment analysts and foreign exchange dealers in banks told Financial Vanguard that there is still apprehension over  further depreciation of the Naira this week, with  foreign portfolio investors (FPIs) sustaining  the massive treasury bills and bonds sell-offs, which last week triggered the biggest daily depreciation of the nation’s currency since 2017.
As a result prices of FGN bonds on the Over-The-Counter (OTC) segment declined sharply while average yields rose by 140 basis points (bpts). Consequently, the 5-year, 14.5 percent FGN July 2021 paper, lost N1.87,    while the yield  rose    to    7.35 percent    from 6.08 percent; the 7-year, 13.53 percent FGN March 2025 note, lost N4.52,    while yield rose to 11.34 percent from 10.23 percent; the 10-year 16.29 percent FGN March 2027 debt lost N17.92 while the yield  rose to 14.05 percent    from 10.6 percent; and the    20-year 16.25 percent FGN April 2037 note    lost N15.03    while yield    rose to 12.18 percent from 10.62 percent.

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This trend was extended to the secondary market for NTBs where average yield shot up by 242bps to 12.6 percent.

“The bears reigned in the NTBs market, as yields continued to spike across the OMO (Open Market Operations) curve. As usual, offshore investors remain the main drivers of the bearish trend noticed in recent days, as they exit long positions in droves”, said analysts at Zedcrest Capital Limited.
Meanwhile, the bid by FPIs to exit the fixed income market combined with  the resurgence of speculation and hoarding activities in the foreign exchange market sparked by the crash in crude oil price,  led to increased dollar demand last week, and on Thursday the Naira recorded its biggest daily depreciation of N15 in the parallel market to close at N382 per dollar and N5.67 in the Investors and Exporters (I&E) window to close at N374 per dollar.

CBN intervention

The sharp depreciation of the Naira was however halted on Friday following a statement by the CBN to address the fears.
In a statement titled: “Market Fundamentals Do Not Support Naira Devaluation at This Time”,  Isaac Okoroafor, Director of Corporate Communication, CBN, said: “The Central bank of Nigeria (CBN) wishes to note with displeasure, the rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the CBN is on the verge of devaluing the naira, and triggering panic in the FX Market.
“These rumours are false, unwarranted and calculated to serve their dubious and  selfish ends.  The size of Nigeria’s foreign exchange reserves remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand. As such, the CBN remains able and willing to meet all genuine demand for foreign exchange for legitimate transactions”.

The statement which came after the apex bank’s meeting with the executives of Association of Bureaux De Change Operators of Nigeria (ABCON) where it warned BDCs against sharp practices, caused the Naira to regain some value on Friday as the parallel market exchange rate dropped to N370 per dollar from N382 per dollar on Thursday.

Similarly the Naira appreciated in the I&E window to N368.47 per dollar on Friday from N374 per dollar on Thursday.
But compared to previous week, the Naira depreciated week-on-week    by N12 in the parallel market as the market exchange closed at N370 per dollar from N358 per dollar the previous week, while it also depreciated by N2.22 in the I&E window to N368.47 per dollar from N366.47 per dollar the previous week.

Sell-offs by FPIs to persist
The depreciation trend, according to analysts, will likely persist this week as the bond and NTB sell-offs by FPIs are expected to continue.
“Most of the FPIs who want to go have already gone though some of them are trapped in the market due to unavailability of dollars. They will go once they get the means to do so. So the sell-off will continue next week though not at the same pace”, said a bank executive who spoke on condition of anonymity.

Analysts at Cordros Capital Limited similarly stated: “We expect foreign investor led selloffs to persist in the OMO secondary market amidst continued  Coronavirus  worries and lower oil prices.”

Devaluation fever

Notwithstanding the statement from the CBN, analysts at Cowry Assets Management Limited, a Lagos based investment house, stressed that fears of Naira devaluation amidst further depreciation in the open market will persist due to a sustained low price range in the crude oil market.
They stated: “In the new week, we expect depreciation of the Naira against the dollar across the market segments against the backdrop of the declining crude oil price.

“We expect OTC (Over-The-Counter) bond prices to depreciate (and yields to rise) as the fear of local currency devaluation at the official window becomes pronounced amid Naira depreciation at the I&E window.”

Also projecting further Naira depreciation in the parallel market in spite of CBN’s intervention, analysts at Afrinvest, another investment banking firm, stated: “We expect the CBN to support the Naira through FX intervention, although concerns about possible devaluation could widen the parallel market premium.”

On their part, analysts at Cordros Capital hinted at further forex restriction by the CBN even as it resists pressure to devalue the Naira. “Given the recent devaluation fears, we believe the CBN will resume its forex management strategy by excluding more items from eligible non-oil imports, which portends a downside risk to overall imports”, they said.

Currency adjustment
Analysts at CardinalStone Capital, however, argued that such measures would worsen FPIs outflow from the economy and also aggravate panic in the forex market.

“A slow policy response to the current crisis could cascade to more aggressive FPI outflows with knock-on effect likely to worsen balance of payment position and reduce CBN’s ability to maintain currency defence.

“We believe the CBN is likely to be slow in responding to these weaknesses and could possibly resort to more unorthodox administrative measures. This delayed response, amid deteriorating currency-related fundamentals, could drive panic in the black market for forex.   Ultimately, we see a greater possibility for a devaluation before the end of the year if the weakness in oil price persists.”

Calling for a gradual currency adjustment, Afrinvest analysts stressed the need to avoid repeating the sharp Naira devaluation which triggered economic recession in 2016

“In our view, the worry is that history could repeat itself, with devastating impact to the economy like we saw during the 2016 recession. We believe a gradual adjustment of the currency would better help the economy adjust to the current shocks and support government revenues.
“The 12-month forward rates suggest a currency value of N408.94/$ and using the long-term REER equilibrium of Nigeria, we forecast a similar 10 percent to 15 percent adjustment”, they said.

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