Implications for Markets as the CBN finally floats the Naira

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Thursday, June 16, 2016 4.45AM / CardinalStone with additions from WSJ

In a very remarkable but positive turn of events, the Central Bank of Nigeria (CBN) announced a full float of the Naira such that the FX market will be market driven with only occasional interventions by the Apex Bank. The FX market will be a 'single' market implying that there will be no window for 'critical transactions' and that the official window will be scrapped. The two way quote system will be also re-introduced.

A Naira appreciation likely in the parallel market
The new price of the Naira will be known on Monday, June 20 when the CBN is expected to commence FX auctions at the inter-bank market. The inter-bank auctions by the Bank is targeted at meeting pent up demand estimated to be between $3-$5 billion. If this auction continues very aggressively in the next 4 - 5 weeks such that most of the backlog is cleared, we expect a Naira appreciation at the black market, and the gap between the new interbank rate and the black market rate narrowed.  

Increased local participation envisaged for equities
For equities, we foresee an initial sell-off by foreign portfolio investors (FPI) so as to repatriate funds. However, if the FX market functions optimally in the next few weeks most FPIs who have been on the sidelines, awaiting some form of clarity on the FX situation, may return to the market.  In anticipation of this, we expect a local market play by both retail and institutional investors, especially retail. Also, with renewed buy interests from retail investors and given their speculative nature, the equities market should experience some level of volatility in the coming weeks. 

A return to foreign Bond indexes?
For the bond market, we are of the opinion that foreign investors and index providers will wait to see that the new exchange rate framework is properly functional before Nigeria's FGN bonds are admitted back into the JPMorgan and Barclays Bank Government Bond Indexes.

Additional details of the framework include:

  • Selected authorised FX primary dealers (FXPD) will be notified by Friday, June 17
  • Returns on the purchases and sales of FX are to be rendered daily to the CBN by the Authorised Dealers  

The forty-one (41) items classified as "Not Valid for Foreign Exchange" remain inadmissible in the Nigerian FX market.

Other Developments – WSJ
Meanwhile, on Tuesday, index provider MSCI Inc. said it would speed up its decision on whether to remove Nigeria from its frontier markets index in light of sharp declines in foreign-exchange reserves that have made it difficult for international investors to repatriate capital from the country.  

In September 2015, Nigeria was removed from J.P. Morgan Chase & Co.’s emerging-market bond index, triggering billions in redemptions from bondholders.


“The investability of the Nigerian equity market is being questioned,” MSCI said, a sentiment that reflects broader questions among investors about the long-presumed inevitability of Africa’s economic rise.


Nigeria is the latest emerging market to struggle with foreign-exchange shortages, exacerbated by a strong dollar and, in some cases, falling commodity prices.


Egypt’s central bank devalued its currency in March, and said it would adopt a more flexible exchange-rate policy as it seeks to ease an acute dollar shortage that is hurting the economy.


Argentina’s peso lost more than a quarter of its value against the U.S. dollar in December, after the new government said it would lift currency controls to attract investors and kick-start the economy.


The World Bank cut its 2016 growth projections for commodity exporters such as Brazil, Russia, Nigeria and Angola last week, as officials there have been forced to cut spending due to falling prices for oil, metals and other raw materials. 

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