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The Slow Boat to FX Reform

Forex
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Wednesday, November 30, 2016/9:56 AM /FBNQuest Research

Nigeria’s proposed floating exchange-rate regime will not emerge until large and steady supplies of fx from autonomous sources complement the CBN’s modest sales to the market.

At this point, confidence would return, offshore players would re-enter local securities markets in sizeable numbers and fx would be traded in genuine two-way transactions. The challenge has been how we arrive at this destination from the current system which is effectively administered, old-style, by the CBN.

One route could be the US$15bn advance payment for crude oil imports by the Indian authorities which Ike Kachikwu, the minister of state for petroleum, is said to have secured on a recent visit to the country.

India has replaced the US as the leading importer of Nigerian crude. However, a recent note by Fitch Ratings on the Nigerian oil industry has queried the value of the deal in practice. The agency has made similar suggestions about the size of the undertakings made during a visit to China in July by Kachikwu and senior NNPC officials.

The minister highlighted commitments totalling US$76bn in loans and investments to the Nigerian oil industry, of which US$69bn were destined for the corporation and government agencies. He acknowledged that a memorandum of understanding was not a binding commitment, and added that a 20% success rate would be an achievement.

These deals would form part of what we have termed the “piecemeal solution” to the malfunctioning of the fx system. Another element would be the sovereign Eurobond, which now appears to have been pushed into Q1 2017.

We expect a successful launch although pricing has become a little less favourable for emerging market issuers since the US presidential election. The yield on Nigeria’s July 2018 maturity has widened by about 20bps on fears of more rate hikes by the Fed than previously expected due to the president-elect’s fiscal agenda.

Under the piecemeal solution, we would gradually arrive at the floating regime. The journey would be more rapid and smoother if the FGN accepted IMF loans for the first time (Good Morning Nigeria, 10 October 2016).

Concessional external financing from, for example, the World Bank and African Development Bank would flow from such an agreement. The omens are poor, however, due to the resistance of the presidency and most influential Nigerians.

We should flag another scenario (not our own) under which we arrive quickly at the fx destination without the IMF loans but with concessions on reforms by a more amenable presidency and FGN.

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