Flexible Exchange Rate Policy Lifts Equities, Bonds

Flexible Exchange Rate Policy Lifts Equities, Bonds
Oladejo Amos
The bulls dominated the equity trading on the Nigerian Stock Exchange on Wednesday following the Central Bank of Nigeria, CBN,’ announcement that it would adopt a more flexible exchange rate policy.
The CBN had on Tuesday said it would adopt a flexible exchange rate policy, a shift from a peg for the naira seen as overvalued, which had hampered investment.
The benchmark index recorded a strong gain of 3.78 per cent to close at 28,260.61 points to levels last seen on January 5, ending a selloff by foreign investors who had quit due to currency curbs and worries they would get caught in the middle of naira devaluation.
The Managing Director of APT Securities Limited, Alhaji Garba Kurufi noted that considering current inflation rate of 13.72 per cent, investors have started taking position on stocks.
He said, “Some people investment in bonds at 12 per cent coupon but the inflation rate is now higher than the interest rate, so investment in stocks is better.”
To the Head, Research, Afrinvest, Mr. Ayodeji Ebo, the cheering news is that the CBN has come to realise that the country need a flexible exchange rate regime rather than the fixed regime.
According to him, the introduction of a flexible interbank market from a de facto peg of around N197 would boost investors’ confidence and create more dollar liquidity.
But the currency parallel market reduced in value, with the naira closing at N350 from N346 to the dollar, as traders were confused over how the new rules would be implemented.
The Acting President of Bureau De Change Operators, Aminu Gwadabe said the CBN settled dollar bids submitted last week at its pegged rate of N197, implying that the new policy was yet to take effect.
Bond prices rose as traders bought debt to cover positions taken before the central bank decision as they had expected the main rate to stay at 12 per cent to tackle slowing economic growth.
Analysts have enjoined the CBN to clarify on what it describes as a special window for critical transactions for which preferential rates will apply.
The Managing Director of Financial Derivative Company, Mr. Bismarck Rewane, noted that considering the level of corruption in the country, the special window for forex will be abused.
According to him, just like the fuel subsidy was abused, the special window too will be abused as banks will disburse the forex based on their discretion.
He added that the economy desires a transparent forex market which guarantees level playing fields for all investors.
The Director General of Lagos Chamber of Commerce and Industry, Alhaji Muda Yusuf said, “We would like to caution against possible abuse and distortions that such a window could create. It could pose a risk to the entire system.  We would like to be assured that the window for the critical transactions will be managed transparently and in a manner that it will not create distortions in the economy.
“Export proceeds, capital importation and Diaspora remittances should be allowed into the economy through the autonomous window at prevailing market rates. And the owners of such funds should have unhindered access to their funds.”
 According to him, the CBN should revisit the list of items that have been placed on exclusion list of the forex market, saying that many critical inputs of manufacturing companies are on the list and this has crippled the operations of such companies creating significant job and output losses.
Few expect foreign investors to return in the short term after exiting the debt market last year due to JP Morgan’s decision to remove Nigeria from its government bond index.
Parliament summoned the CBN governor and the finance minister to explain its shift, which also puzzled some analysts.
“To the sceptics among us, this will simply sound like a re-hash of the same old material we’ve been hearing about since December 2015,” said Alan Cameron at Exotic Partners.
President Muhammadu Buhari said last December there would be a more flexible system but took no action. Since then he has vehemently rejected any naira devaluation.
Analysts expected the interbank market to take a cue from the N285 to the dollar now used by the government to calculate fuel imports.