With $53.9 billion turnover in 15 months, the Investors’ and Exporters’ (I&E) Forex Window launched by the Central Bank of Nigeria (CBN) in April, last year, has surpassed stakeholders’ expectation. The window is not only a boost to forex liquidity, but to the recovery in the manufacturing sector. The June Manufacturing Purchasing Managers’ Index (PMI) report showed an upbeat in productive activities as manufacturers get more access to foreign exchange, writes COLLINS NWEZE.
Not many investors – local and international – gave it any chance to succeed when it was introduced. But, 15 months after, the Investors’ and Exporters’ (I&E) Forex window was launched by the Central Bank of Nigeria (CBN), has attracted $53.9 billion to the economy.
A report by FSDH Research, said that prior to the I&E Forex window introduction in April last year, the market and exchange rates were in turmoil. However, in a dramatic turn of events, the acute shortage of forex, which businesses and individuals grappled with, witnessed an unprecedented improvement, with banks and Bureaux de Change (BDCs) now desperately looking for forex buyers.
The FSDH Research Monthly Economic and Financial Market Outlook, said the positive domestic and external environment will further lead to external reserves accretion in the short-term, a development the report predicted will further stabilise the foreign exchange rate.
It said the 30-day moving average external reserves increased by 0.36 per cent up from $47.49 billion at end-April to $47.66 billion at May 28. The month-on-month growth rate recorded in the external reserves was the lowest level since July 2017. The pressure on demand from foreign investors was mainly responsible for the low growth in the external reserves.
“The total turnover at the Investors’ and Exporters’ FX Window (I&E Window) between April 2017 and May 2018 stood at $50.73 billion. The highest amount was recorded in January 2018. Our analysis between August 2017 and May 2018 shows that Nigeria recorded the lowest foreign exchange inflows through the I&E Window in May 2018,” the report said.
According to the report, the value of the naira depreciated further at the inter-bank and parallel markets in May, compared with April. The demand pressure at the I&E Window occasioned by foreign investors’ repatriation of their matured fixed income investments was largely responsible for the depreciation of the naira.
So inclement was the business environment before the I&E Forex Window that investors were relocating to more investment-friendly environment. The development was triggered by the crash in crude oil prices that worsened the woes of the local currency.
Besides, the local equities market and the foreign exchange (forex) market were in shambles. The All Share Index (ALSI) was continuously shrinking and the naira weakened against other currencies, especially the dollar.
The I&E window has become the attraction, making many of the business concerns to take another look at their exit from the country.
The introduction of the window was followed by continuous interventions by the CBN which enabled banks and BDC operators to meet forex demand at the retail end of the market. Thus, the window has become a life-saving pill for the domestic economy as it has attracted over $20 billion into the market, enhanced transparency and made forex available to the end-users.
The operations of companies, especially manufacturing, has been on the upward swing with an improvement in inflation figures as well as equities market performance.
According to the CBN Director in charge of Financial Markets, Alvan Ikoku, the “Investors’ & Exporters’ FX Window” is boosting liquidity in the forex market and ensuring timely execution and settlement for eligible transactions by all parties.
Before the stability in the forex market and naira, the economy witnessed a depressed Gross Domestic Product (GDP) growth, which culminated in a recession in 2016.
“There was also rising inflation, which peaked at almost 19 per cent in January 2017 and a persistently rising unemployment rate to 14.23 per cent in 2016 fourth quarter from 6.41 per cent as at 2014 fourth quarter. There was also a significant depreciation of the exchange rate, reaching N525 to $1 in February 2017 and witnessed a fast depletion of the reserves which was drained down from about $23.6 billion in October 2016 from as high as $40 billion in January 2014.
“The I&E Forex window, seen as a ‘willing buyer, willing-seller window’, allows foreign investors to bring in dollars into the economy at any price of their choice, provided they could find buyers at such rate. The figure at the window has also impacted positively on the Purchasing Managers’ Index (PMI).”
A Lagos-based economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, described the introduction of the I&E forex window as the best policy implemented by the CBN in 2017.
Rewane noted that the naira traded flat at the forex market at N362/$ and that the CBN forex intervention in June, surpassing May by 53.8 per cent to $2.2 billion while external reserves pushed lower in June to $47.63 billion.
He said: “Prior to this, investors were of the view that the naira was overvalued and not at a market-determined level. The I&E FX window, higher oil prices and production, and the CBN’s consistent intervention in the forex market are the main drivers of the stability and the convergence of exchange rates in Nigeria today.”
The Global Markets Group Head at Access Bank Plc, Dapo Olagunju, said the window allows investors to sell dollars at any rate they choose and is expected to help bring investors’ confidence into the market.
He said: “Investors/Exporters FX Window helps participants execute deals as based on their own market agreement. Today, both the dollar demand and supply sides are beginning to talk to each other and there is likely to be rate convergence soon.”
A report by Exotic Capital, an investment and research firm, titled: ‘Fragile Recovery, Positive Outlook’, said that Nigeria’s forex regime, although still far from ideal, has begun to stabilise.
It said: “A multiple currency regime evolved after the oil price fall in 2014 and the June 2016 devaluation of the naira, which led to a widening divergence between the official and parallel markets (the parallel market premium reached 100 per cent in January 2017.
“The current regime has shown a vast improvement this year with the introduction of the I&E Forex window last April.”
It said the parallel rate for the naira, in the range of N360 to N365, is nearly identical to the I&E Forex window rate, used for international investors as well as importers and exporters, and has seen close to $20 billion in cumulative transactions since its introduction.
Commenting on the issue at the Access Bank forex seminar, Rewane stated that the creation of the this window was a good move on the part of the CBN as it will lead closer to the emergence of a Real Effective Exchange Rate (REER) for the country.
His words: “Any measure that increases the supply of forex and the number of suppliers will help to reduce the dominance of the CBN as the major supplier of forex in the market and move us closer to the emergence of a REER. This will attract more investors and lead us closer to a perfect market.”
Barely a month after trading at the window commenced, international credit rating agency, Fitch Ratings, released a report, stating that the establishment of the I&E Forex window had led to an improvement in banks’ forex liquidity situation.
The naira has been stable at the official and parallel markets, with the foreign exchange (forex) reserves standing at $47.6 billion, a report by Exotic Capital, an investment and research firm, has said.
The report said although the level of reserves was still below the record high of $64 billion realised in August 2008, it has nearly doubled the $24 billion recorded in October 2016, increasing by more than $22 billion in 17 months.
The economy benefited from increased forex supply with over $20 billion inflow to the I&E window since inception.
“We have written extensively on Nigeria’s multiple exchange rate system and will abstain from further discussion at present, suffice to say that a fairly valued naira at 360 to the dollar combined with high domestic rates has led to a tremendous increase in the level of gross foreign reserves held at the CBN,” the report said.
A similar report by FBN Capital, entitled: “Towards the $50 billion threshold, and counting”, said the rapid accumulation of $15.96 billion over 12 months was due to two sizeable Eurobond launches, a small diaspora bond issue, the recovery in oil export revenues (through the Nigeria National Petroleum Corporation’s share of production and, more recently, the steady bid by the CBN at the I&E Forex window.
The FBN Capital report said: “We should stress that the data are gross and mask the swap transactions the CBN has entered into with local banks. The steady bid by the CBN has been seen variously as a response to the softening of demand for forex by importers and other economic actors, and as a move to contain naira appreciation.
“The CBN will be pleased with the healthy signals from I&E Forex window where the weekly average has now settled above $1 billion.”
Speaking on the issue, CBN’s Acting Director, Corporate Communications, Isaac Okorafor, reiterated the bank’s commitment to ensure adequate forex supply to genuine customers to achieve the goal of forex rates convergence.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, said the window has won the confidence of foreign investors. He said the window attracted foreign investors’ appetite for Nigerian assets leading to impressive appreciation in the equities market and stabilising the naira.
Before the introduction of the window, foreign investors’ appetite for local assets waned significantly on the back of currency crisis which in turn fundamentally weakened macroeconomic performance, dragged corporate earnings and also impacted on equities market viability.
According to the CBN spokesman, forex supply to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to naira. The apex bank is a market participant at the window to promote liquidity and professional market conduct.
He said that the apex bank assured that the exchange rates of the transactions would be as agreed between authorised dealers and their counterparties.
Besides, he said the regulator reserved the right to intervene as a buyer or seller, as it deems fit, in the window, even as information on transactions between authorized dealers is reported to the CBN on a daily basis. Manufacturers and other foreign exchange (forex) end-users also seem to be having a great time over the coming of the window.
The improved access forex by local manufacturers is positively impacting on the economy as the manufacturing sector, which was in comatose for nearly two years, has been upbeat in the last four months.
Manufacturing picks up
The Manufacturing Purchasing Managers’ Index (PMI) of June stood at 57.0 index points, indicating expansion in the manufacturing sector for the 15th consecutive month, a CBN survey shows.
The Manufacturing and Non-Manufacturing PMI Report on businesses is based on survey responses, indicating the changes in the level of business activities in the current month compared with the previous month.
A composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicates that it is generally contracting.
The CBN report showed that the index grew faster in June when compared to the index in the previous month.
It said: “Of the 14 subsectors surveyed, 10 reported growth in the review month in the following order: paper products; furniture & related products; printing & related support activities; food, beverage & tobacco products; plastics & rubber products; electrical equipment; textile, apparel, leather & footwear; chemical & pharmaceutical products; petroleum & coal products and nonmetallic mineral products.
It added: “The transportation equipment; fabricated metal products; primary metal; and cement subsectors declined in the review month.”
The CBN report explained that at 59.2 points, the production level index for the manufacturing sector grew for the 16th consecutive month in June. The index indicated a faster growth in the current month, when compared to its level in the preceding month.
“Ten of the 14 manufacturing subsectors recorded increase in production level, one remained unchanged, while the remaining three recorded declines in the production level in the month under review. At 56.2 points, the new orders index grew for the 15th consecutive month, indicating increase in new orders in June,” it added.
Continuing, it said eight sub-sectors reported growth, two remained unchanged while four were contracted in the review month.
“The manufacturing supplier delivery time index stood at 56.5 points in June, indicating slower supplier delivery time for the thirteenth consecutive month. Eight subsectors recorded improved suppliers’ delivery time, while six remained unchanged,” it said.
Also, the manufacturing sector inventories index grew for the 15 consecutive month in June 2018. At 57.7 points, the index grew at a slower rate when compared to its level in the previous month. Eleven of the 14 subsectors recorded growth, two remained unchanged while one recorded decline in raw material inventories.
“The composite PMI for the non-manufacturing sector stood at 57.5 points in June 2018, indicating expansion in the non-manufacturing PMI for the fourteenth consecutive month. The index grew at a faster rate when compared to that in May. Fourteen of the 17 subsectors recorded growth in the following order: repair, maintenance/washing of motor vehicles; agriculture; information & communication; professional, scientific, & technical services; finance and insurance; utilities; water supply, sewage & waste management; health care & social assistance; real estate rental & leasing; electricity, gas, steam & air conditioning supply; wholesale/retail trade; construction; management of companies; and transportation and warehousing,” it said.
The arts, entertainment & recreation subsector remained unchanged, while the accommodation & food services; and educational services subsectors recorded contraction during the period under review.
