Nigeria FX confusion persists, damaging investor, business sentiment
A two-week silence from Nigeria’s government and central bank on further details or even a timescale for naira liberalisation has left international investors and domestic firms anxious about whether a gameplan has been even formulated or agreed.
A government investment roadshow to London this week was professional and upbeat, according to money managers who attended. But they were alarmed at the lack of any steer on what happens next in Nigeria’s fractured foreign exchange market.
Africa’s biggest economy is facing its biggest crisis for decades as the halving in oil prices since 2014, followed by the 2015 introduction of a currency peg that put investors to flight, has produced a black market for the naira currency and brought economic growth to a standstill.
With the naira’s black market value plunging past 350 per dollar – versus the official rate of 197 – and a major chunk of transactions now happening at the unofficial rate, inflation is at 6-year highs and the economy contracted 0.4 percent in the first quarter – the first such drop since the 1990s.
Fund managers had hoped this week’s meeting with finance minister Kemi Adeosun and other senior officials would shed light on when currency curbs would be removed.
Many point out that little has been heard on the subject since the central bank’s end-of-May announcement about ditching the peg and a move to use a different, weaker exchange rate for petrol imports.
They were little wiser after Tuesday’s meeting in London’s plush Corinthia Hotel.
“There was nothing on FX policy, which was disappointing given they are doing this round of meetings with investors. It was a straight bat – I don’t think they have worked out the details,” Standard Life Investments portfolio manager, Mark Baker, said.
“My feeling is the (central bank) felt pressured to make an announcement but have not worked out the finer details.”
The central bank has declined to comment since the meeting when the shift to a flexible naira was first announced. The Tuesday roadshow was closed to the media.
Baker and other attendees said they were impressed with other aspects of the presentation by Adeosun, a British-born former banker, who outlined reform plans for a country where energy comprises 70 percent of exports.
But the naira dominates discussions, with investors unwilling to buy it until a devaluation is past.
“We are struggling to value the naira and the message we received from the finance minister yesterday did not indicate that we should expect to see a sizeable devaluation soon,” Pinebridge Investments portfolio manager, Anders Faergeman, said.
Equity investors too are wary of additional Nigeria exposure in absence of currency convertibility, RWC Partners’ James Johnstone said, noting the huge hit domestic growth and consumption have already taken.
Foreigners held $5.4 billion of Nigerian bonds in September 2013 but dumped them after the country was ejected last year from the most widely used GBI-EM debt index.
Nigeria stocks have fallen 6.5 percent this year despite a near-doubling in oil prices. Foreign share dealing was 34.4 billion naira in March, down 66 percent from a year ago, the stock exchange said, and more than half those transactions involved share sales.
And the value of capital imported into Nigeria plunged to $710.97 million in the first quarter, a 73.8 percent decline from year-ago levels, the National Bureau of Statistics said.
“Part of frustration of the situation is that if they did devalue they would trigger a wave of inflows into bonds … that would bring dollars into the market,” Baker said, citing 10-year yields at a juicy 14 percent.
President Muhammadu Buhari who spent his first year in office supporting the peg, has confused matters further by apparently giving his blessing to a flexible exchange rate but saying he remains opposed to devaluation.
Local businesses have been hit much harder by the uncertainty, with the central bank rationing dollars for imports via auctions and exporters required to sell hard currency through banks at the official rate.
That paralysis has been exacerbated by the promise of change but little sign of it actually happening, a top executive at a Nigerian commodity exporter told Reuters in Lagos.
“We heard post-MPC a lot was going to happen. If the central bank had a plan one or two days afterwards they would have released it. Post-MPC, they have created a lot of uncertainty,” the executive said, referring to the central bank meeting.
“We know that a two-window market is coming but don’t know when. We need a bit of clarity which should come as soon as possible.”
Similarly, members of Nigeria’s currency dealers’ association (FMDA) last week said Central Bank Governor Godwin Emefiele’s failure to detail plans showed he “does not understand the meaning of signals”.
But any transition will be a tough one. A devaluation or a removal of curbs could cause a spike in dollar demand which would torpedo the exchange rate.
Exotix economist Alan Cameron estimates the demand backlog could be as big as $3 billion, or 10 percent of central bank reserves. That may be behind the dithering, he says.
“They have allowed this to persist for too long. The risk is they find themselves in a situation where they devalue and find themselves unable to defend the currency even at a weaker rate,” he said.