CBN traps offshore investors as interbank FX liquidity collapses

Dec 23, 2014/BusinessDay

  • May accelerate capital flight
  • Wide black market set to re-emerge

The circular reducing the FX trading position of banks to 0 percent of shareholders’ funds from 1 percent has led to a collapse in interbank FX liquidity, Business Day has learnt.

This has left foreign investors trapped in the market, including those who ordinarily would not have considered exiting the market, sources tell BusinessDay.

FX turnover on the interbank market may have dropped to $30-50m a day, from around $500m in the past, trading sources tell BusinessDay.

“Before the announcement, foreign investors were gradually starting to consider long NGN positions in the non-deliverable forward market, albeit in short-dated positions,” Samir Gadio, Head of Africa Strategy, FICC Research at Standard Chartered Bank told BusinessDay in response to questions.

“So we were moving towards an inflection point where some investors could have tentatively taken NGN risk for the first time in several weeks. Yet the latest FX circular has weighed negatively on confidence.”

The Central Bank of Nigeria (CBN) has been battling to defend the naira since the sell-off in crude oil prices began in early June 2014.

CBN Governor Godwin Emefiele who made hints at a rate cut earlier in the year, has had to abandon such plans and tighten liquidity to give investors an incentive to hold naira assets.

Such an incentive might have evaporated with the recent CBN moves, as onshore and offshore market players may now start to expect other administrative FX measures, including an artificial cap on USD-NGN levels, as in February 2009 say some analysts BusinessDay talked to.

“International investors, even those who did not actually plan to fully exit the market, are now trapped in Nigeria,” said a market dealer speaking on condition of anonymity.

“This in itself may add to the bearish positioning towards the NGN, accelerate capital flight and/or lead to the re-emergence of a black market.”

The CBN had recourse to administrative measures to stabilise the interbank FX market in early 2009 by capping interbank USD-NGN levels at 1 percent above the RDAS rate.

At the time, interbank FX market liquidity vanished and it became increasingly difficult to source USD for offshore and onshore market players.

Analysts say as a result, a significant black market emerged and at its peak, the spread between the interbank/RDAS and black market rates widened to almost NGN 30 with the black market rate exceeding USD-NGN 180.

These measures lasted from February to May 2009.

Governor Emefiele has said that the emergency measures were designed to end speculative pressure on the currency of Africa’s biggest economy.

“We do not want speculators in this market any longer,” Emefiele said in an interview last week. “The banks are not supposed to hold any funds of their own. They are supposed to buy and sell currency on behalf of customers.”

The naira fell 12 percent against the dollar this quarter, the worst among 24 African currencies after Malawi’s kwacha, according to Bloomberg data .

As of Dec. 8, the CBN foreign reserves stood at $35.95 billion, down nearly 20 percent from a year ago.

Nigeria officially devalued the currency by eight percent last month and widened its target trading band to N160-176 against the dollar, but few analysts believe that level can hold, given dwindling state oil revenues and declining reserves.

“NGN T-bill yields have surged to attractive levels (19% for the 364-day T-bill at the last auction), but given the current environment in the FX market, we are unfortunately unlikely to see renewed offshore bids until FX restrictions are lifted,” Gadio told BusinessDay.

Calls by BusinessDay to the corporate communications department of the CBN were unanswered, while an email sent to the department was not replied.

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