The New 'Investors and Exporters Window' Framework - Another Step to Improving Liquidity

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Monday, April 24, 2017/5:26 PM /CardinalStone Research 

A New FX Framework - Investors’ & Exporters’ FX Window

The CBN recently announced a special FX window for investors and exporters (the ‘Investors & Exporters’ FX window’ or ‘IEW’). 

According to the CBN, the purpose of this window is to boost liquidity in the FX market and ensure timely execution and settlement for eligible transactions.   

Key Operational Details of The Framework

According to the CBN, the supply of FX to this window is expected to come from portfolio investors, exporters, Authorized Dealers (Deposit Money Banks) and ‘other parties’ with foreign currency to exchange to Naira, while transactions eligible to access the window will include;

·         Invisible transactions (excluding international airline ticket sales remittances1 ) including loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management services fees, consultancy fees, software subscription fees, technology transfer agreements, personal home remittances and other eligible invisible transactions including ‘Miscellaneous Payments’ as detailed under the Memorandum 15 of the CBN foreign exchange manual.

·         Bills for collection

·         Any other trade-related payment obligations (at the instance of the customer)  

The Price Discovery Process

The exchange rate of transactions at this window will be as agreed by the Authorized Dealers and their counterparts i.e. on a willing buyer and willing seller basis. Other details are as follows:  

·         Trades will be conducted via recorded telephone conversations and other forms as long as such trades are officially documented.

·         The FMDQ will poll buying and selling rates and other relevant information from market participants and will publish an indicative opening (at 9 am) and closing (at 4 pm) midrate on its website daily.

·   The FMDQ is expected to develop and publish a new fixing to be called Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) for settlement of OTC FX Futures going forward.    

Our Preliminary Thoughts

A market determined rate is positive news – On the basis that this new FX window will be market driven, given that prices will be as agreed between buyers and sellers, we think this is a positive step and is indicative of a possible move to a more flexible FX market in the near term.

We foresee improved liquidity and transparency for foreign portfolio investors – There will be more transparency in this new window which should encourage the participation of foreign portfolio investors.  

With increased transparency, new foreign investors can provide liquidity directly to exiting investors through authorized dealers (deposit money banks).  

Hence, key constraints around liquidity and transparency which have deterred strong foreign participation in Nigeria’s financial markets, despite attractive fixed income yields and equity valuations, will be minimized.  

We expect the equity and bond markets to react positively in the next few days/weeks.  

But supply side liquidity may be constrained if IOCs and IMTOs are not part of ‘exporters’ and ‘others’ in the window – The CBN did not state expressly that International Oil Companies (IOCs) will be allowed to participate in this new FX window.  

We recall a previous agreement brokered by the Minister of State for Petroleum, Dr. Ibe Kachikwu, matching exports proceeds from IOCs to petroleum marketers at a rate consistent with the PPPRA’s2 pricing template.  

To the extent that no official communication has been circulated as to the cancellation of this pact, we safely assume that they may be excluded from the new window. Oil exports account for over 80% of total exports, and so the IOCs are the largest exporters – and the second largest source of FX in the market. 

International Monetary Transfer Operators (IMTOs) were also not stated as participants in this new window and diaspora remittances are a major source of FX in the market.  

IMTOs have been directed to sell foreign currency from diaspora remittances to licensed Bureau De Change (BDCs) operators. We think that excluding IOCs and IMTOs from this window will largely constrain liquidity.  

The CBN may therefore need to support supply side liquidity. Given this, we foresee more offshore outflows than inflows on implementation, as investors looking to come in may wait to see how the new framework operates.

Will there be a devaluation or a fully liberalized market soon? – Although we do not completely rule out a full liberalization of the market, we also do not foresee it happening anytime soon.  

Our reason is that a full liberalization will impact the cost of petrol imports and the result of this is either a further hike in fuel prices – which may heighten sociopolitical tensions, or a re-introduction of fuel subsidies which are not provided for in the soon to be approved 2017 budget.  

Notwithstanding, if with this new window, the existing arbitrage in the market becomes minuscule, there will be increased level of confidence in the market regardless of the variety of rates.        

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