Flash Report /

Nigeria: Local investor apathy contributes to FX divergence

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Tellimer Research
    26 February 2020
    Published byTellimer Research
    • The Central Bank of Nigeria (CBN) has limited the amount of foreign currency (FX) cash deposits that can be electronically transferred to US$10,000.

    • This could lead to a slowdown in foreign currency investments by local investors.

    • Demand for FX via electronic transfers has been rising following the recent decline in yields on NGN-denominated fixed income instruments and concerns about the stability of the NairaStill, we don’t foresee any changes to FX policy or the FX rate in the near term.

    Central bank responds to surge in FX electronic transfers…

    The CBN has limited the amount of FX cash deposits that can be electronically transferred to US$10,000. This comes after a few days of confusion when the CBN appeared to stipulate that electronically transferred FX into domiciliary accounts can only be withdrawn by electronic transfer, while cash deposits can only be withdrawn as cash. The CBN’s statement and recent tweets clarifying rules for domiciliary accounts are most likely in response to a surge in demand for FX via electronic transfers in recent months and to curtail it. There has been an increasing divergence between electronic transfer and cash deposits, with the Naira depreciating to NGN370 levels against the USD in the less visible electronic transfer market, while the NGN/USD rate remains stable in the cash segment of the FX market at NGN360/USD levels. 

    … as local investors pushed to foreign currency investments

    The recent increase in demand for FX via electronic transfer could be due to a decline in yields in NGN-denominated fixed income instruments, following the restriction of Open Market Operations to only foreign investors and local banks. This saw yields on 365-day bills fall as low as 5% in 2020 from highs of 14% in November 2019. Also, concerns on the local currency on the back of the decline in oil prices (down 13% yoy to US$56/barrel as of 24 February 2020) and the slide in FX reserves (down 14% yoy to US$36.6bn as of 21 February 2020), have pushed local investors to foreign currency investments such as USD Money Market Funds with yields almost at par with NGN-denominated Treasury Bills.

    T-bill yield 

    Source: FMDQ, CBN, Tellimer Research

    But CBN unlikely to change stance on local currency

    The CBN’s latest move could lead to a slowdown in foreign currency investments by local investors, in the absence of a new innovative structured foreign currency products.

    Although there has been a depreciation of the NGN/USD at the electronic transfer market, which could continue as supply in this segment of the FX market is now limited, the CBN is likely to maintain its stance and uphold its defence of the local currency at NGN360/USD levels for the foreseeable future. This will be supported by the low visibility of the electronic transfer segment of the FX market compared to the cash segment, which is widely quoted.

    However, the CBN’s stance may change if FX liquidity in the economy declines significantly, especially if oil prices and FX reserves fall below US$45/barrel and US$30bn, respectively. As we stated in our 2020 credit outlook, we believe the fair value of the local currency is NGN400/USD, based on our internal valuation.