Investors Yearn For ‘Workable’ Forex Regime | Independent Newspapers Limited
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Investors Yearn For ‘Workable’ Forex Regime

Posted: Apr 29, 2016 at 4:21 am   /   by   /   comments (0)


Retreating investors from Nigeria’s economy want to see a more ‘workable’ foreign exchange regime in place, one that does not lend itself to forex shortages and weaker growth, Independent has gathered.

They say they are not pushing for devaluation, that all they want is a workable foreign exchange regime that will ensure sustainability in the long run.

Most companies that spoke to Independent say dearth of dollars as a result of plummeting oil price is forcing them to buy the greenback at black market premium. They say this has pushed up operating costs and prices of goods and making business difficult to operate in the country.

The naira has been under intense pressure since the start of the oil price rout in mid-2014. Scarcity of dollars at the interbank market has pushed the cost of the greenback to an all-time high at the unofficial black market.

The naira on Thursday exchanged at N321 to the dollar at the parallel market. The Central Bank of Nigeria (CBN) has pegged N197-N199 per dollar since March 2015 through a series of foreign exchange controls, seeking to conserve reserves amid a plunge in crude prices.

“We need to be clear; foreign investors are not seeking a ‘devaluation’ and this is likely a misrepresentation of the issue. They do want to see a more workable foreign exchange regime in place, one that does not lend itself to forex shortages and weaker growth, significant currency misalignment with fundamentals, and therefore the risk of a large and sizeable devaluation that might offset any gain from their investments in Nigeria”, said Razia Khan, Managing Director, Chief Economist, Africa Global Research at Standard Chartered Bank, London.

She noted: “The only way to credibly reassure against a sizeable devaluation is to put in place an forex regime that reassures on the extent of currency misalignment.  This means demand and supply should ideally play some role in the determination of the forex rate.”

Gaimin Nonyane, Senior Macroeconomist/LKA Project Manager, Ecobank London, said developments in the nation’s economy are reflective of investors’ risk-off sentiment over concern for the outlook of inflation and the exchange rate.

“What I can tell you is that Nigeria’s Federal Government has had to step in to help repay states’ creditors (including local bondholders) owing to the slump in oil receipts. We are also seeing a drop in investment in Nigeria (predominantly in the oil sector), and renewed rise in Nigeria’s primary market yields (yields on Nigeria’s 3-and 5-yr bonds have risen in the range of 95 to 105bp since end-Q4 15) reflecting investor risk-off sentiment over concern for the outlook of inflation and the exchange rate,” he pointed out.

Nonyane explained thus: “Headline inflation (as well as core inflation) has accelerated in recent months to 12.8%, up from 9.6%, while the level of divergence between the official and the parallel NGN rates has doubled since the beginning of the year to around NGN120 (the official rate stands at USD1:NGN199.1 against USD1:NGN320 in the parallel market), reflecting structural imbalance between USD supply and demand, which will be reflected if the CBN continues to sell large amounts of USD to the interbank market.”

He opined that with the oil price outlook remaining weak (despite the recent pick-up in prices) and given no indication from the CBN to devalue the NGN, primary market yields are likely to rise further as investors continue to price in the effect of rising inflation and a weakening currency on their returns.

To this end, he anticipates further devaluation of the naira by 10 to 15 percent by end-Q2 2016, which could take the interbank exchange rate up to 225 to USD1. His assumptions were based on the significant challenges facing the country, alongside the government’s high financing requirement.

Samir Gadio, Head, Africa Strategy FICC Research at Standard Chartered Bank, said foreign portfolio investors are currently shunning the bond market because they want a more attractive and sustainable forex entry points and a more liquid forex trading.

“The sell-off in bonds reflects tighter market liquidity as well as more hawkish interest rate expectations and the uptrend in inflation, which has eroded real returns. With inflation at 12.8%, the yield curve up to 10Y is still in negative CPI-adjusted yield territory.

“That said, the re-pricing of the bond market has been overwhelmingly driven by domestic investors, as offshore participation in FGN debt is currently virtually non-existent,” he said.

Dr. Ayo Teriba, economist and Managing Director of Economist Associates, says those seeking devaluation are not investors in the real sense, noting that they are portfolio investors who come and put money in investments for a short period in bonds and the equities investments.

“They shouldn’t be called investors. It is a fact. They are interested in returns in a short period. They are not stable. They are the ones that want exchange rate to be high, exchange rate to be devalued. They want quick profit they are not into any long-term investments.

“They come to make profit and when there is no profit they begin to complain. There own contribution is minimal. You have to be careful when you say foreign investors are living the country. Those leaving the country are the foreign portfolio investors not the real foreign investors who are in the country for long term business,” he explained.

“Coca Cola, Stanbic IBTCM, DSTV, Standard Chartered Bank are all multinationals. All the multinationals in the country are foreign direct investors. Some of these companies are also quoted while some are privately quoted. They bring their money to make tangible investments in the country and therefore they are long-term investors,” he continued.

Tola Odukoya, Managing Director, Dunn Loren Merrifield, said: “While devaluation is a reality Nigeria has to contend with at some point in time. I do not believe we should engage in that exercise simply because foreign investors want it. For me, the critical question remains “whose interests will be best served by currency devaluation at this point in time? Let’s bear in mind that investors are equally wary of capital controls so devaluation may not be the only reason for their holding back.”

Matthew Ogagavouria, a stockbroker, believes that the time is ripe for government to provide the enabling environment to encourage local investors to take their rightful place in the nation’s equities market.

“I am of the opinion that the future of this country is in the hands of the local investors who will not leave the market in good times and bad times. Devaluation of the naira is a time bomb that must explode anytime from now. Whether we like it or not, this naira needs to be devalued at some point but I won’t want any group of investors to dictate to us when to devalue our currency”, he noted.