Implications of CBN's Adjustment to the I and E Window Rate

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Monday, January 04, 2021 / 3:00 PM / by FBNQuest Research / Header Image Credit: Business Day

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Event: CBN adjusts naira exchange rate at the investors' and exporters' (I&E, or NAFEX) window from NGN394 to NGN410 on 31 December.


Implications: This is the latest small adjustment to rates by the CBN when, in our view, it feels cornered. It follows steps taken in March and July '20. Demand for fx remains high and the supply is inadequate for regular uses, let alone the pipeline of delayed external payments. According to FMDQ, local sources (principally the CBN and non-bank corporates) are providing more than 90% of fx inflows at the I&E window. We could say that this is a welcome move towards the 'market determined' rate that the FGN has loosely pledged: however, it does not represent 'fair value', regardless of how this may be calculated, or reflect inflation differentials because these are not official objectives. The parallel rate is quoted on a popular website this morning at NGN465/NGN470.


Monthly average exchange rates (NGN per USD)

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Source: CBN; FBNQuest Capital Research


Positives: We expect a modest pick-up in inflows as a result of the adjustment, predominantly from local sources. We do not expect much of a response from foreign portfolio investors (FPIs): the local equities market gained 50% last year with negligible foreign participation and returns on FGN debt instruments compare poorly with many EM peers. The move may unlock some multilateral budget support from the World Bank and others that was said to be conditional upon unspecified movement on exchange-rate policy. On the macro side, the adjustment gives a boost to non-oil exports and to all inflows converted into naira at the I&E window (or bureaux de change).


Turnover on NAFEX (USD 'bn)

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Source: FMDQ; FBNQuest Capital Research


Negatives:  There are no obvious market negatives. However, in  macro terms we note the upward push to import prices, subject of course to the ability of business to access this window for its needs, and therefore inflation, which has risen every month since August 2019 and is approaching 15% y/y. We would normally add the cost of servicing external debt but for at least the FGN this would be booked at the official rate.


The CBN's move is part of a sequence. We see more of the same  ahead unless somehow soaring oil revenue comes to the rescue of the CBN (and the FGN). The chart on NAFEX turnover shows that, while an improvement on the lows seen in April and May, volumes are still far below pre-COVID-19 levels of +/- USD7bn. At these 'normal levels', fx was available for all users.


An about-turn by the CBN and its adoption of a unified 'market determined' rate, which we still view as unlikely, would not be transformative in isolation. We should remember that FPIs entered the local debt market in large numbers in 2018 and early 2019 at a time of multiple rates that were far from any objective accurate valuation. Foreign investors have several items on their wish list, of which the exchange rate is one. We should add good access to ports, consistent tariff policy, an accessible government, investment in  power and roads, and much more.

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