Naira Gains N0.21 On I&E FX Window, In Aftermath Of Emefiele’s Reappointment

The nation’s fixed income and currency markets, on Friday, reacted positively to previous day’s nomination of Godwin Emefiele as Governor of the Central Bank of Nigeria (CBN) for a second and final five-year term, by President Muhammadu Buhari, via a letter read by Dr. Bukola Saraki, the Senate President.

There was a 15 basis points decline in yields across the bond curve and the increase in the investors and Exporters foreign exchange window turnover to a nine-day high of $367.2m, with the NAFEX rate appreciating by 21 kobo to close at N360.88/$, according to analysts at CardinalStone.

Confirmation will make Emefiele the first CBN governor so reappointed since 1999, even as the last sitting governor to be reappointed was Alhaji Abdulkadir Ahmed, who served from 1982 to 1993. He was, therefore, CBN Governor partly under Alhaji Shehu Shagari civilian administration and military government of Generals Muhammadu Buhari, Ibrahim Babangida, and Sanni Abacha.

In the report prepared by Michael Nwakalor and Phillip Anegbe, analysts, at Cardinal Stone linked the fixed income and currency markets’ reaction to expectations of continuity of monetary policy going forward.

“In addition to this, Emefiele’s largely hawkish posture in the last five years may have endeared him to some yield-chasing foreign and domestic portfolio managers, who largely switched to investment in Nigeria’s short-term debt instruments amidst heightened global risk and low yield in developed markets,” as was most obvious in 2018.

In this regard, they noted that investments in money market instruments accounted for 50.4% of capital importation in 2018, compared to the 21.1% flow into the equity segment in the same period, as against 37.8% in 2017.

“While the latest monetary policy twist (i.e. 50bps cut in the MPR) and gradual reduction of stop rates at recent OMO auctions are relatively dovish, we believe the spreads between Nigerian sovereign instruments and those of key developed markets are still attractive enough to entice some short term capital providers, barring significant shocks to oil price and domestic economic fundamentals.”

The re-appointment, however, failed to stop the four-day losing streak in the equities market, as the Nigerian Stock Exchange (NSE) All-Share index slipped 0.17% down on Friday.

The analysts also see Emefiele’s re-appointment “as a presidential stamp of approval on the performance of the CBN and its monetary policy committee in the last five years. In line with market expectation, we are also of the view that the re-appointment could lead to continuity of the current policy direction, which still prioritizes currency stability.”
In the near term, the analysts see a continuation of the multiple exchange rate regime, with the likelihood of gradual convergence.
“This convergence may see the Retail SMIS rate slowly move from the current N330/$ – N345/$ range to the N360/$ level.

“However, the official rate (primarily used to support PMS importation and for budget purposes) is likely to remain unchanged at c.N305/$ in the near term, just as they see a likelihood in the CBN continuing its intervention in various FX markets to support liquidity, as the need arises. This position is strengthened by the increase in the portion of reserves available to defend the Naira.

With Emefiele’s reappointment, the analysts see likely retention of the FX ban on non-eligible items may likely be retained in the near term, just as they believe “the CBN may be open to adding more items to its basket of restricted items to support domestic economic activities if the need arises.

“We expect continued Implementation of the intervention programs targeted at incentivizing growth in strategic sectors such as agriculture and manufacturing, just as implementation of the special Cash Reserve Ratio window to incentivize bank lending to select sectors may gain traction in this second term in office.

Also likely is a slight moderation in treasury yields, even as the “CBN’s relatively looser grip on system liquidity and gradual reduction of stop rates at OMO auctions suggest that MPC’s recent monetary policy twist may be extended in the coming months. The MPC is likely to reduce the MPR by a further 50-100bps by year end in a bid to support economic growth.
“It is our view that the policy rate only plays a signaling role in the country’s monetary policy dynamics, with the CBN utilizing OMO instruments as its key policy tool for achieving price and exchange rate stability in recent years.”

Consequently, the Cardinal Stone analysts “note that the yield on the 360-day OMO instrument has fallen by 30 bps to 14.02% since the last MPC meeting. With oil prices (YTD average: $65.8/bbl) and reserves ($44.8 billion) at favourable levels, we anticipate further moderation in yields through 2019.

“However, the degree of yield moderation is likely to be capped by sticky inflationary pressures. As at April 2019, the inflation-adjusted spread on the one-year T-Bill was 281bps compared to a median of 335bps for emerging market peers. We expect yields on the one-year instrument to settle around 250bps to 310bps above inflation, which translates to yields of 13.8% to 14.4%, considering the peculiarities pertinent to Nigeria that improves its relative attractiveness.

“We believe that the current monetary policy priorities have positive implications for near term exchange rate stability; however, we are still concerned about the long-term ramifications for growth.”
The report recalled that the CBN governor’s first tenure was characterized by declining investments in growth-inducing foreign direct investment (FDI) and a surge in investors’ appetite for money market instruments.
“Precisely, annual FDI has hovered between $900m and $1.3bn since 2015, compared to $2.3bn in 2014 when Emefiele was appointed.

“Current FDI inflows account for 0.2% of GDP, compared to 0.8% in 2014 and an average of 1.8% for Sub-Saharan Africa. The decline in FDI is in stark contrast to the surge in FPI flows, chasing money market instruments. Money market inflows rose from $1bn in 2014 to $3.2bn in 2017 and $8.5bn in 2018.

“We believe that while hot money provides support for the FX and reserves, the flows are short term and susceptible to flight during periods of crude oil price decline, temporary domestic shocks, and other externalities. Foreign direct investment, however, is less fickle and provides support for long term sustainable growth.

“While fiscal policy has a great part to play in attracting FDI (more growth-focused reforms, strong structural frameworks, investment in infrastructure and amenities, etc.), we highlight that foreign investors have continued to express discomfort with the multiple exchange rate regime as well as the artificial elevation of the naira above its fair value (our calculations suggest a fair value of N395.71/$). We believe that a managed float that is closer to the fair value of the Naira would create a more conducive environment for long term investment.

“We believe that continued divergence in the exchange rate from its true value will widen with the current trajectory, with IMF’s inflation forecasts suggesting double digits reading until 2020. Further divergence will continue to dissuade long term investors as well as increase the downside risk of a forced devaluation akin to that of June 2016,” the report added.

https://investdata.com.ng/2019/05/naira-gains-n0-21-on-ie-fx-window-in-aftermath-of-emefieles-reappointment/