In FT Interview, Cardoso Says Investors Getting Comfortable with Nigeria’s FX Market

•Declares CBN returning to orthodox policy, doing everything to tame rising inflation 

•Hints at further MPR hike

•Fitch ratings raises concerns over apex bank’s unverified $2.2bn FX backlogs by apex bank

•Naira weakens to N1,478/$ on official window, N1,485/$ on parallel market

Emmanuel Addeh, James in Abuja and Nume Ekeghe in Lagos, with agency report

The Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, has said investors have become more comfortable with the apex bank’s strategic management of the foreign exchange (FX) market.

Speaking during an interview with the Financial Times (FT), Cardoso stated that whereas in the past businessmen had a, “tendency to head for the window” in response to currency fluctuations, they now understand that there’s a fundamental shift in the FX market.

Cardoso’s statement came just as Fitch Ratings expressed reservations over the regulatory direction of the CBN, suggesting that recent measures may impede the banking sector’s ability to bolster the country’s revised economic trajectory.

Specifically, the global agency highlighted concerns over a $2.2 billion foreign exchange backlog, which Cardoso had stated could not be verified and therefore would not be honored.

Equally, yesterday, the naira declined on both the official FX window and the parallel FX market as THISDAY gathered that the Economic and Financial Crimes Commission (EFCC) has continued to arrest Bureau de Change (BDC) operators in Lagos. 

At the Nigerian Autonomous Foreign Exchange (NAFEM) window, the naira depreciated to N1,478.11/$1, which was a N11.8 loss compared to N1,466.31/$1 which it closed on Friday. 

Also, at the end of trading yesterday, the parallel market FX rate closed at N1,485/$1, which was a loss of N45 compared to N1,440/$1, which it exchanged over the weekend.

The daily FX turnover recorded an increase in transactions of 91.23 per cent, to $217.64 million yesterday, compared to the $113.78 million recorded on Friday. The highest spot rate observed yesterday stood at N1,515, with the lowest spot rate recorded at N1,301.

Furthermore, in the FT interview, Cardoso, said the Monetary Policy Committee (MPC) which he chairs, would adopt appropriate measures to tackle rising inflation currently at 33.2 per cent.

Besides, the CBN governor indicated that interest rates would stay high for as long as necessary to tame inflation, saying the institution had moved decisively to an “orthodox policy”.

Cardoso had previously criticised the past leadership of the bank for not focusing squarely on its core functions and literally spreading itself too thin.

“Let’s face it: for a long period of time, the CBN did not embrace orthodox monetary policies,” Cardoso said. “We want to go back to using an orthodox method, and it will take us to where we want to go,” he added.

Cardoso stressed that the apex bank had been “reoriented” to focus on “price and monetary stability”. The bank hiked rates by 400 and 200 basis points in February and March respectively, lifting the key lending rate to 24.75 per cent.

The moves were praised by investors for halting the slide in the naira against the US dollar. The Nigerian currency hit a record low of N1,625 on March 11 before recovering to N1,284 last month, according to LSEG data.

While the naira has since lost some of those gains, Cardoso said the situation had now stabilised. Investors had previously had a “tendency to head for the window” in response to currency fluctuations, he said.

But now, he said, there had been a “fundamental shift”. “They’re getting more comfortable with the market,” he stressed. Markets have generally welcomed the CBN’s stance under Cardoso.

Cardoso, a former Citigroup executive who became central bank chief in September, told the news medium that there was “every indication” that the monetary policy committee he chairs would “do whatever is necessary” to keep soaring inflation in check.

“They will continue to do what has to be done to ensure that inflation comes down,” Cardoso said, ahead of the central bank’s meeting on May 20-21, where some analysts expect a further chunky rate hike.

Inflation in Nigeria remains stubbornly high at 33.2 per cent, the highest in three decades. Food inflation is higher still at 40 per cent, a sharp blow to the living standards of poorer citizens who devote a larger share of their income to staples, such as rice. Assaults on grain warehouses have been reported across the country.

“The return to orthodoxy has been very much endorsed by investors,” Chief Economist at Standard Chartered Bank, Razia Khan said.

“While Nigeria is not seeking an IMF programme it is implementing the kind of policies that would be endorsed by the IMF,” he said.

The IMF said in its latest Nigeria report last week that the central bank had, “unequivocally committed to price stability as its core mandate,” and urged the bank to keep monetary policy tight to fight inflation and build the country’s external reserves.

Yet Cardoso’s policies do not receive universal domestic support, with businesses complaining about the high cost of credit even as foreign portfolio investors have gradually returned to the country.

Cardoso said he hoped that high rates would not “linger” for too long and act as a disincentive to investment and production.

But he said raising rates had been essential.

“Hiking interest rates obviously has had a dampening effect on the foreign exchange market, so that has begun to moderate. It’s not a zero-sum game. You lose on one side, you get on the other.”

Revamping the central bank is a key plank of President Bola Tinubu’s attempts to re-engineer Nigeria’s faltering economy, which lost its place in 2022 as the biggest on the continent thanks to sluggish growth and the weaker naira.

Last year, Tinubu partially removed popular but costly fuel subsidies while the central bank ended the currency peg that allowed the naira to be overvalued against the dollar. Although the government said the reforms would bear fruit in the medium-term, Nigerians have been grappling with the worst cost of living crisis in a generation as a result.

Cardoso conceded that inflation was higher than he had hoped, blaming “distortions” mainly because of high food prices. “That obviously is something that is not directly within our control,” he said.

The central bank has not updated its inflation target of 6-9 per cent for more than a decade, but analysts expect this will be revised upwards.

Dumebi Oluwole, a senior economist at Lagos-based data firm Stears, told the Financial Times that they expected inflation to fall to between 23.9-25.8 per cent by the end of the year.

“The central bank is on the mark with what needs to be done,” Oluwole said. “But we have to remember that Nigeria’s inflation is a lot more structural. Issues like insecurity are affecting our ability to produce food and that is inducing food inflation,” Oluwole argued.

 Meanwhile, Fitch Ratings has underscored concerns over a $2.2 billion FX backlog, which Cardoso had stated could not be verified and therefore would not be honored.

Highlighting the CBN’s intensified efforts to reform the monetary and exchange rate framework, Fitch cautioned about the risks associated with potential additional regulations that might undermine the banking sector’s capacity to support macroeconomic stability.

Also, in its latest assessment, posted on its website, the international rating agency revised the Outlook on the Long-Term Issuer Default Ratings (IDRs) of five Nigerian banks and one bank holding company from ‘Stable to Positive’ while affirming their Long-Term IDRs at ‘B-‘.

The affected issuers were Access Bank Plc, Zenith Bank Plc, United Bank for Africa Plc (UBA), Guaranty Trust Bank Limited (GTB), Guaranty Trust Holding Company Plc (GTCO) and the Bank of Industry Limited (BoI).

On monetary policy, it stated: “The CBN has stepped up efforts to reform the monetary and exchange rate framework, including by increasing the monetary policy rate by a total 600 basis point (bp) in February and March, and the large differential between the official and parallel market exchange rate has collapsed.

“Average daily FX turnover at the official FX window has risen sharply from second half 2023 (2H23), albeit there has been renewed volatility, and the CBN has cleared $4.5 billion of the backlog of unpaid FX forwards, which is positive for the banking sector’s FC liquidity.

“However, $2.2 billion of “unverified” FX forwards have yet to be cleared and there are risks of the CBN introducing more regulations that are detrimental to the banking sector to support macroeconomic stability.”

On the banks’ revision, Fitch noted that Nigeria’s Long-Term IDRs were likely to exert less constraint on the issuers’ standalone creditworthiness in the near term.

 According to Fitch, the adjustment in the Outlooks on the Long-Term IDRs mirrors the recent sovereign Outlook revision, indicating a positive trajectory in Nigeria’s overall creditworthiness. The agency attributed this positive shift to government reforms aimed at restoring macroeconomic stability, enhancing policy coherence, and improving credibility.

While the issuers’ National Ratings remained unaffected, Fitch highlighted that the Long-Term IDRs of Access Bank, Zenith Bank, UBA, GTB, and GTCO were primarily influenced by their standalone creditworthiness, as reflected by their Viability Ratings (VR) of ‘b-‘. However, the VRs are constrained by Nigeria’s Long-Term IDRs due to high sovereign exposure, market conditions, and operating environment constraints.

Despite the positive outlook, Fitch acknowledged ongoing challenges in the operating environment, including significant credit and market risks to the banking sector. These risks included currency devaluation, inflationary pressures and capitalisation concerns.

Nonetheless, the banking sector’s resilience was expected to be supported by anticipated increases in equity issuance to meet heightened capital requirements by the first quarter of 2026.

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