How investors, exporters’ window stabilises FX market

In just a year of its establishment, the Investors and Exporters’ (I&E) FX window of the Central Bank of Nigeria (CBN)  has helped the country boost liquidity in the Foreign Exchange (FX) market and ensure timely execution and settlement for eligible transactions.

The I&E Window was established in April 2017 to boost liquidity in the FX market and ensure timely execution and settlement for eligible transactions as stipulated by the CBN.

The operating modality is on a willing buyer/willing seller basis. The exchange rates of the transactions are as agreed between authorised dealers and their counterparties, which engender transparency and liquidity.

Eligible transactions to access the window are invisible transactions (excluding international airlines ticket sales remittances), bills for collection, and any other trade-related payment obligations (at the instance of the customer). The invisible transactions include capital repatriation, loan repayments, loan interest payment, dividends/income remittances and consultancy fees.

Others are software subscription fees, technology transfer agreements, personal home remittances and other such other eligible invisible transactions.

In a circular, dated April 25, 2017, the CBN noted that, “Supply of foreign currency to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange naira. The CBN shall also be a market participant at this window to promote liquidity and professional market conduct.’’

Although the policy was pitched almost a year after the CBN originally reneged on the June 2016 announcement of a transition to a flexible foreign exchange framework, initial scepticism which greeted I&E fizzled out within weeks post-introduction after FX transactions in the window cumulated to US$1.9bn by May 2017.

According to experts at the Afrinvest, “The singular act of a market reflective of pricing of foreign exchange, coupled with the recovery in global oil prices as well as the stability in domestic production, following cessation of militancy attacks on oil installations, reset the stage for a broad-based macroeconomic rebound.”

Shortly afterwards, exacerbating inflationary pressures began to moderate – settling at 13.3% in March 2018. The economy slipped out of recession in Q2:2017 and grew 0.8% Y-o-Y in 2017, pressure on consumer spending power also tapered while recovery from external sector shock materialized amid improved export figures (most especially from crude oil).

The experts said: “Most remarkably, Foreign Portfolio Inflow (FPI) data has reflected the attraction of foreign investors into the Nigerian equities market with inflow into equities accounting for 29.7% and 49.6% of total capital and FPI flows respectively; resulting in a 42.3% equity market return in 2017 with NSE ASI as the 11th best performing index in the world and 2nd in Africa.”

The performance of the window is one which has brought great delight to the CBN, the spokesman of the bank, Isaac Okoroafor, said in a recent chat with Daily Trust at the Spring meeting of the International Monetary Fund and the World Bank in Washington DC.

Okoroafor said: “About a year ago, we were here and the story was different. If you recall, the Nigerian economy was going through one of its worst situations. Inflation was high, the foreign exchange market was in turmoil and the economy was in recession. Also, we faced a crunchy foreign exchange scarcity and everybody swooped on Nigeria. Our reserves were down and the whole situation was ominous.

“We now have our reserves strong, over $47 billion, inflation has gone down to 13.34, foreign exchange market is now very stable and growth has taken off, we are out of recession,” said Okoroafor

Analysis of data by FMDQ revealed that the market recorded turnover of $26 billion in 2017, while it has so far recorded $18.84 billion turnover this year.

Experts at Afrinvest, however expressed concern that whilst FPI flow recovery post I&E introduction is nearing the pre-2014 shock levels of US$14.9bn with the 2017 inflow at US$7.3bn, attraction of Foreign Direct Investment (FDI) has been steadily slow, dwarfing the 2014 annual levels by 56.9%, notwithstanding structural reforms policy document rolled out by the fiscal authority.

They said: “The Economic Recovery and Growth Plan (ERGP), despite having a launch date preceding the I&E, has achieved very little in generating patient real sector FDI flow with long lasting impact on employment and growth; thus begging the question; Where is our FDI?

“But more essentially, recent lull in foreign equity investor sentiment, post-January 2018 Bull Run, suggests more dangerously, the dominance of foreign investors in shaping market sentiments and propelling positive equity market trends or otherwise.”

The question that begs for answers at this point would be: “What do equities hold for the rest of 2018 and are there still bright spots for the market in the build-up to the 2019 general elections? Should investors “sell in May and go away“ or are there still cherry-picks plausible for potential upsides?

Financial experts will provide answers to these questions as developments unfold.