Investors-Exporters FX Window: Solution or Yet Another Palliative?

In response to the weak level of autonomous participation in the domestic FX market, the CBN launched a new FX window on Monday - tagged “Investors’ & Exporters’ FX Window”(IEFW) - which is expected to have portfolio investors, exporters, authorised dealers as well as the CBN as market participants. The window was created to cater to invisible transactions (capital repatriation, dividend remittances, loan repayments, loan interest repayments, software subscription payments amongst others), bills for collection and any other trade related payments with the exception of international Airlines ticket sales’ remittances. Airline remittances will only be eligible to access FX from the CBN’s secondary market intervention.

More importantly, unlike the other FX windows previously opened by the CBN, pricing at the IEFW is completely market determined on a willing buyer willing seller basis, with polls taken from ten (10) contributing banks daily to determine closing spot rate for a new fixing called the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) which is published by the FMDQ daily by 12:00 noon. Accordingly, all Naira-settled OTC FX Futures offered from April 2018 and above shall settle at the NAFEX rate while holders of outstanding open contracts (April 2017 to March 2018 maturities) will be afforded the opportunity of either settling at the prevailing NIFEX or NAFEX rate – with attendant caveats - at maturity. In addition, trading at NAFEX market is executed over the phone in the interim as the CBN gauges the market depth to determine an appropriate time to migrate trading to the Thomson Reuters FX Trading & Auctions Systems.

The implementation of the IEFW since the market first opened for trading on Monday has been largely inspiring as our interactions with dealers suggest that rates have been independently determined by market forces through willing counterparties (buyers and sellers) though liquidity is still a constraint as participants are still trying to study the operational framework, depth and sustainability of the market structure. Of particular concern is that oil exporters and International Money Transfer Operators (IMTO’s) are exempted from supplying currency in the window - oil exporters are matched to petroleum marketers while IMTO’s have a separate market with a different pegged FX rate.

Nonetheless, our conversations with dealers suggest there is still much to cheer and we focus on the positives. Dealers have clearly noted that price-discovery is indeed happening in the window, with naira offer rate from FPI’s looking to invest in Naira assets trending downward from initial N420.0 – N410.00 range at the start of the week to a range of N375.00 – N395.00 at Friday close of trade. The CBN has also steered clear from hand-holding dealers, except for occasional interventions in the market in a more market-friendly manner of individually dealing with counterparties (banks) instead of wholesale auctions open to bidding. Thus, despite the poor start on liquidity, there are hopes confidence would return once backlogs of FPIs demands are cleared.

Solution or Yet Another Palliative?
Whilst we commend the CBN on the new policy, we still remain cautioned by the subsisting multiple FX rates and exclusion of important suppliers of FX from the new autonomous market. These two factors could slow the recovery of confidence in the economy and Naira assets even when rebound in cyclical anchors of FX earnings - oil prices and production volumes - clearly justifies the need for complete convergence of rates. The CBN’s justification for maintaining the multiple rates and keeping oil exporters out of the IEFW is that prices of manufactured output (which the CBN subsidises with cheap FX) and petroleum products (which are supplied by oil exporters) are highly correlated to general price level. Our belief is that the CBN may stay the course as long as the political argument for maintaining fixed petrol prices remains. Whilst this seem like an eventuality, we are of the view that the CBN will have to allow the unification of markets and rates as the spread between parallel and NAFEX rates is almost completely eliminated.