Foreign portfolio flows returning as forex reforms boosts confidence (Nigeria)Thursday, June 30, 2016nouria
By Iheanyi Nywachuku | BusinessDay, Nigeria June 30, 2016
Foreign Portfolio Investors (FPIs) who ditched Nigeria following the 50 percent collapse in oil prices and subsequent hard peg of Dollar-Naira (USD-NGN) are beginning to trickle back in, after radical reforms of the foreign exchange (FX) market were introduced by the Central Bank of Nigeria (CBN), last week.
The first trade on the CBN and FMDQ OTC Securities Exchange newly launched FX futures market was done yesterday on flows of foreign portfolio investors.
On the FMDQ OTC FX Futures Trading & Reporting System, Citibank executed a $20million FX Futures trade for Foreign Portfolio Investors (FPIs) at the CBN ten-month (April 26, 2017) quote of N210/$.
“They have started coming back,” said a treasurer at a major bank, speaking on condition of anonymity.
“Foreign investors are impressed with the FX liberalisation and today’s trade means they believe the naira will firm up in a matter of months.”
Sources tell BusinessDay that senior executives of an international bank also visited the FMDQ yesterday, to understand the process of the FX futures.
“They left impressed and promised to start talking to investors. The sentiment is positive towards Nigeria and they believe the new FX guidelines and FX futures are game changers.”
The naira rose by 0.29 percent against the dollar on Wednesday at the spot market, to N282.32, almost converging with the Futures Market one-month contract, quoting the currency at N279.
The CBN cleared a backlog of dollar demand by selling more than $4 billion in the spot and forward markets on the first day of trading, following the reopening of the market last week.
As foreign investors return, trading in the Nigerian interbank foreign-exchange market is gradually picking up, with turnover averaging about $40 million a day last week, which is still a far cry from volumes as high as $1 billion in 2014.
“This is yet another notable milestone for the Nigerian FX market and we heartily congratulate Citibank Nigeria Limited for brokering the first naira-settled OTC FX Futures deal on the FMDQ System. Interestingly, both domestic and international financial market participants recognise the opportunity in transforming risk into certainty, as it obtains in the Futures market and are keen to effectively and efficiently manage their FX risks and exposures,” said Bola Onadele Koko, managing director/CEO, FMDQ OTC Securities Exchange.
Nigerian stocks ended a three day slump, as the NSE-ASI gained 0.80 percent, to close at 29,812.91 points as market capitalisation increased N81.62 billion, to close at N10.24 trillion.
The CBN and FMDQ Securities Exchange launched the OTC FX futures market -a non-deliverable forwards contract –to improve FX liquidity, while also reducing volatility occasioned by panic-buying and front-loading.
The OTC FX Futures rates show 12-month (June 2017) tenor rate at N225/$; 9-month (March 2017) tenor rate at (N222/$); 6-month (December 2016) tenor rate at (N250/$); 3-month (September 2016) tenor rate at (N275/$); and 1-month (July 2016) tenor rate at (N279/$).
The CBN is the pioneer seller, paving the way for liquidity in this new market by offering quotes for non-standardised amounts for different tenors, spanning from one month through to 12 months, to settle on bespoke maturity dates.
With the Naira-Settled OTC FX Futures Market, the apex bank is availed a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy.
“Portfolio investors will likely view the reopening of the FX market as a positive development. They are monitoring market developments in Nigeria very closely. If price discovery and liquidity improve in the FX market over time, the offshore appetite for NGN traded assets could also increase gradually,” Samir Gadio, Head of Africa strategy and FICC research at Standard Chartered Bank, said.