Emefiele Rebuilds Investor Confidence, Begins Clearing FX Backlog

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Godwin Emefiele
Godwin Emefiele

Obinna Chima writes about major steps taken by the banking sector regulator to rebuild confidence in Nigeria’s financial market

A major concern among Foreign Portfolio Investors (FPIs) in Nigeria since the twin shocks of the oil price and COVID-19 had been the repatriation of their funds. Owing to this, some investors became nervous and decided to sit on their funds until the coast is clear. This contributed to the slowdown in capital importation into the country in recent time.

But, despite the challenge, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, kept on assuring foreign investors in the country of the safety of their funds despite the forex scarcity. And in line with the earlier promise, the CBN last week started the sale of forex to banks to clear the backlog of demand in the market, which was put at $2 billion.

THISDAY gathered that the apex bank adopted the strategy of a combination of spot and 150-day forward sales to clear the accumulated FX demand.

While the central bank is clearing the forex backlog, on the chaotic parallel market, the naira strengthened to N430 to a dollar same week as against about N480 to a dollar it had been trading in the past days, majorly due to a pronouncement of plan to re-start the sale of the greenback to Bureau De Change (BDC) operators.

However, the clearing of the forex backlog which commenced last Monday, has seen the bank selling $25 million daily and is expected to continue weekly until it is completely sorted out, THISDAY learnt.

“As it is now, all the foreign portfolio investors are relaxed because of the intervention by the apex bank. They (CBN) have promised us that it would be weekly until everything is cleared,” a source told THISDAY.

CBN Director, Corporate Communications, Mr. Isaac Okoroafor, who confirmed the clearance, said: “We have always said that once we understand the depth of the situation fully, we would start intervening. So, we have started clearing the FX backlog.”

THISDAY also gathered that in order to stimulate FX liquidity, CBN has also been intervening at the Investors and Exporters’ (I&E) window, where on Tuesday and Wednesday it sold $5 million respectively and may continue on that path this week.

Emefiele had assured foreign investors in the country of the safety of their funds despite the scarcity of forex the country is presently facing due to the significant drop in oil revenue.

Speaking at a recent media briefing in Abuja, Emefiele had allayed fears expressed by some foreign investors, just as he guaranteed those interested in repatriating their funds that their monies were safe.

Recalling that the country faced a similar situation between 2015 and 2016, he said the central bank had put in place measures to ensure an orderly exit for those interested in doing so.

The CBN governor explained: “In 2015 and 2016, we faced the same situation. What did we do? We called a meeting of the correspondent banks and development partners. We told them that none of them would lose their money in Nigeria.

“And I am happy that we went through that without anybody losing his money in Nigeria. We made sure those that wanted to go were able to take their monies out because things turned around and we also put in place policies that made it possible for them to take their monies out.

“We always like to support an orderly exit, but not an exit where everybody rushes to the door at the same time. If there is a fire in this room and everybody rushes to the door at the same time, I am sure the fatalities would be more than if we all go out through the door in an orderly manner; and that is what we are appealing to everybody.

“If you have Letters of Credit or dollar obligations, we are asking you to be patient. There may be some delay, but I am giving 100 per cent assurance to everybody that they would not lose a cent of their monies if they desire to take their monies out. But we are seeking the patience and understanding of everybody.”

Analysts Hail Move

The co-founder of Cardinal Stone Partners Limited, a Lagos-based investment firm, Mr. Mohammed Garuba, said clearing the backlog of forex demand in the financial market has restored confidence in the market.

Garuba said: “I can confirm to you that the CBN started clearing the backlog on Monday, August 31.

“It was a big shock to the market and a very pleasant surprise. On Monday, CBN supplied just $10 million, Tuesday it did $25 million and another $25 million today (Wednesday).

“The one they did on Monday gave CBN clarity on the total outstanding demand. So, the bank was able to get the total volume and demand. Now, CBN knows the amount of backlog and now has full clarity on accumulated demand to date.”

According to him, the fact that CBN has started clearing the FX backlog is giving confidence to the market.

“Most of these monies would not come back because interest rates are too low to attract them back. So, why waste money when you know the person would not come back? CBN is not interested in increasing interest rates aggressively to destroy the economy,” he said.

However, the Cardinal Stone boss anticipated that the stock market might record some depreciation in the short-term because of the development.

“But I believe that this strategy adopted by CBN might make sense because the FPIs come in and hit you when you least expected. If we would see FPIs come into the country again, they would be honest, long-term investors who are coming to seek good returns and I think that message has been passed.

“CBN kept to its words. It had said there would be an orderly clearance of the FX backlog and luckily they have lived up to that expectation. They shocked the market by doing this when we least expected. So, I think they are also doing this ahead of the World Bank funds and this is a show of confidence,” Garuba added.

On his part, the Chief Executive Officer, FMDQ Group, Mr. Bola Onadele, explained that the outbreak of the COVID-19 brought about a collapse in crude oil price, which went as low as $10, and led to dislocation in the FX market.

According to him, whenever there’s market dislocation, the regulator easily would think of how to stabilise the system to ensure that there is no collapse.

“So, what CBN did was to take control of the market. Now that the apex bank has seen that there is stability in crude oil price, which we know has a high correlation with the FX market in Nigeria, CBN has started taking action.

“The first one is to clear the backlog. What has happened is that when CBN took control of the market, it couldn’t satisfy all the demand. So, CBN has commenced sales to the corporates, selling spot and forward,” he added.

He said the intervention by the central bank has calmed the market and strengthened investors’ confidence.

Onadele said: “Since this pandemic started, we must acknowledge that CBN kept the futures market and guaranteed the rates, and that is commendable.

“You have also seen that in the retail market, the apex bank has also supported that market and you can see that the parallel market rate is dropping. In actual fact, a lot of people that had been sitting on dollar position are now selling.

“The expectation is that the banks would also support the market liquidity by selling. So, the more everyone sells, the naira would continue to strengthen. All the other markets would benefit if the FX market ramps up again and so we should continue to support the central bank.”

Naira Strengthens at Parallel Market

However, the expected resumption of forex sales to BDCs saw the naira improving significantly at the parallel market as it appreciated by about 9.3 per cent.

Currency dealers attributed the development to the planned resumption of forex sales by the Central Bank of Nigeria (CBN) to operators of Bureau De Change (BDC), which according to them is expected to bolster dollar liquidity in the market.

The apex bank is expected to resume forex sales to BDCs tomorrow. It had announced its intention to resume forex sales to the retail segment of the market, but was forced to postpone it because of the extension of the date for resumption of international flights to September 5.

President, Association of Bureau De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said the announcement of the plan to resume forex sales to the currency dealers was the major factor that led to the gain recorded by the nation’s currency against the greenback.

He said: “The plan to resume forex sales to BDCs was what broke the camel’s back. Dollar supply to BDCs is a potent weapon to fight against speculation. For those still speculating in the market, they are already burning their fingers and taking losses.

“So, my advice is that when you don’t have a genuine and effective need to use dollars, stop stockpiling the currency. From what we are seeing, this trajectory is going to continue and I advise members of the public to always buy when you have a purpose for it and not buying to keep.

“What we saw in the market in the past few weeks was not a true reflection of the value of the naira against the dollar. We saw, even during the lockdown when flights were not flying, everybody literally became a forex dealer. It is unfortunate. That cannot happen in other countries. When you don’t need to make payments abroad, what are you hoarding dollars for? It’s unfortunate.”

He expressed optimism that once his members re-commence business by Monday, the naira exchange rate at the parallel market would improve further.

“With just a pronouncement, you can see the impact. So, once we are back, we expect the naira to appreciate further,” he added.

The currency dealer foresees the naira strengthening further to “between N415 to N420 to a dollar next week,” saying “the trajectory is expected to continue towards the unified rate of the BDC and Investors and Exporters window, which is about N386 to a dollar.”

Gwadabe added: “That is the target that all the operators in the forex market, that is the BDCs, the banks, the I & E window, are targeting. So, speculators like I told you would continue to count their losses. This is not the time to hoard, to speculate or even to undermine the dexterity of CBN management.”

He also urged security agents to check the illegal movement of dollar cash with the resumption of international flights on September 5.

CBN had in a circular dated August 27, 2020, addressed to all authorised dealers, BDC operators and members of the public, said the resumption of forex sales was part of efforts to enhance accessibility of the greenback, particularly to travellers following the announcement of the limited resumption of international flights.

Purchase of forex by BDCs shall be on Monday, and Wednesdays in the first instance, it had stated.

According to the apex bank, BDCs are expected to “ensure that their accounts with the banks are duly funded with the equivalent naira proceeds on Fridays and Tuesdays accordingly.”

The CBN Governor recently stressed that the CBN will continue to pursue unification of exchange rate around the NAFEX, commonly known as the I& E window.

“Now, talking about the parallel market, we have always said that the parallel market, or what people always refer to as the black market, is a market for people who want to do dealings that are not recognised by the authorities,” he added.

Going forward, it is expected that measures adopted by the central bank to address the situation will restore confidence in the country’s financial markets as well as bring comfort to foreign investors.