Firm Rules Out Forex Scarcity in 2018

By Obinna Chima

Analysts at Lagos-based CSL Stockbrokers Limited have expressed optimism that foreign exchange (forex) supply in the economy will remain sufficient in 2018 to ensure there is not a return to de facto capital controls that were in place in 2015-2016.
The investment and financial advisory firm also stated that it does not foresee investors or businesses having trouble in accessing forex as was the case before the Investors’ and Exporters’ Window (I&E window) was introduced in April 2017.
The CSL Stockbrokers stated this in its 2018 Economic Outlook titled: “Out of the Woods,” that was obtained on Monday.
That said, they stressed that shifting fundamentals in the form of higher import demand and lower investment inflows mightlead to depreciatory pressure on the I&E window.
It stated that its CPI-based fair value model suggested that the nation’s currency is 13 per cent overvalued at present and that a fair value for the naira at the end of 2018, based on projected inflation differentials, is around N450/US$.
“However, we doubt that the CBN will allow the currency to depreciate that far and we expect the currency to end the year at N380/$, five per cent below current levels.
“We expect yields on treasury instruments to remain in double digits across the curve and, given that we are only expecting limited depreciation, carry trade will remain attractive for foreign investors.
“From a duration perspective, we see more value at the short-to-mid part of the curve, with the long-end richly priced,” it stated.
According to the report the outlook for the availability of forex and the naira’s exchange rate in 2018 was the major question occupying the minds of investors in Nigerian assets.
The introduction of the I& E Window (quoted as the Nigerian Autonomous Exchange Rate Fixing or NAFEX) in April significantly improved participants’ access to forex, helping to attract large inflows to the debt markets in particular as investors have become confident that they will be able to access forex to repatriate capital.
However, expectations that treasury instrument yields will fall in 2018 has stoked fears that a slowdown or reversal in portfolio flows will cause a ‘rush to the door’, leading to renewed shortages of FX in the system and potentially to rationing of FX supplies.
“The short answer is that we do not think that such a scenario is likely, and we believe that participants will retain unhindered access to forex via the I&E window in 2018 for three major reasons.
“Firstly, we are relatively sanguine on the outlook for both oil prices and production in 2018, believing that output will come in at around the 1.8mbpd mark and that prices will average US$61/bbl, which bodes well for the supply of oil dollars, historically the most important source of forex for the economy.
“Secondly and perhaps most importantly, we believe that the Central Bank of Nigeria (CBN) will remain willing and able to ensure participants’ continued access to the I&E window.
“On the willingness side, CBN officials have repeatedly extoled the success of the I&E window in monetary policy communiqués and in interviews with the press,” it added.
Turnover on the I & E window has risen steadily since its introduction in April (total turnover was US$26 billion since inception as of end 2017) and is largely the reason for the improvement in broad sentiment over recent months.
To this end, CSL Stockbrokers’ analysts pointed out that it was unlikely that the CBN would want to alter the system given its positive reception. They also expressed belief that the CBN will also have the ability to persist with the market from a financial standpoint.
“Although it has supplied dollars to the I&E window on occasion through its Single Secondary Market Intervention Sales (SMIS), it has remained a net buyer of FX on the market since it was introduced in April.
“As a result, reserves have risen steadily to a three-year high of US$38.4 billion in late December, giving the authorities the resources to keep the market supplied during periods of lulls of autonomous inflows.
“Finally, while we believe that Treasury yields will fall as the CBN begins to loosen monetary policy, we believe that declines will be relatively small and that carry trade on local currency debt will remain attractive, supporting continued inflows to the market,” it stated.
It also predicted a 200 basis points cut to the Monetary Policy Rate as high inflation and depreciatory pressures keep the policy-makers cautious.
“Furthermore, we are expecting recurrent spending to exceed the amount targeted in the budget and that the government will rely on local debt markets to finance this additional spending,” it added.