The IFEX Window Now a Major Indicator of Value?

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Thursday, September 07, 2017 / 10:07AM /FDC

Since its introduction earlier in the year, the success of the IFEX window seems to be restoring lost confidence in the naira. It also appears to be a more accurate reflection of market realities. In the last 2 weeks, the exchange rate in this window has appreciated to new levels of N359/$, 1.95% above the parallel market rate of N366/$. Year to date, the total turnover in the mar-ket is $9.6bn (as at August 30), with a daily average turnover of approximately $170mn in the last two months.

However, the question in every analyst’s mind is ‘how sustainable are the gains in this FX market segment?’ The CBN’s continued participation, though a declining function of time, and stable oil proceeds have helped drive this success. Therefore any threat to oil prices and production will affect the sustainability of this market. Two major risks come to mind and these are risks to oil proceeds and the risk to foreign portfolio investment which is partly a function of perception.

Nigeria’s oil revenue is both production and price sensitive. On the domestic side is the level of oil production. According to OPEC, Nigeria’s production level has picked up momentum, currently at 1.75mbpd (July 2017)5; thanks to the relative stability in the Niger Delta. However, there is a cap on the country’s out-put level at 1.8mbpd, which means any further increase will be minimal.

There are also talks about the possibility of Nigeria being included in the OPEC output cut, as the Minister of State for Petroleum has been invited to the September 22 meeting in Vienna. The worst case scenario is for Nigeria to be included and this is revenue and reserves negative for Nigeria.

On the global side, the price of Brent crude (a variant of Nigeria’s Bonny Light) has been hovering within the range of $50-$52pb. As with any other commodity, oil is subject to volatility and price shocks, the most recent been the Tropical Storm Harvey which has led to the shutdown of refineries in Texas, USA. The impact of this weather phenomenon is a fall in demand for oil which can lead to a rise in crude inventories.

The Tropical Storm also affected production but the production shortages are smaller in comparison to the rise in inventory level. Hence the main question is how fast refineries will resume operations; the faster the better.

The other risk is of subdued investor confidence in the Nigerian economy. So far, there has been an in-crease in portfolio funds which was one of the driving factors influencing the stock market rally. This is be-cause of improved investor confidence in the market: the forex market is operating more efficiently than before, the exchange rate has appreciated in comparison to Q1, proxies for growth such as the Purchasing managers index are pointing towards a slow but gradual recovery and Q2 GDP growth came in positive at 0.55%.

However, as easily as these funds have come in, they can also flow out if there is a change in perception and this would affect trades at the IEFX win-dow which also depends on FPIs.

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