Nigeria new naira move encourages, but investors want more

Foreign investors, generally welcoming of Nigerian authorities' apparent moves to loosen their grip on the naira, say they will steer clear of a market they once favoured until they are convinced of currency flexibility.
Two weeks ago Nigeria added another exchange rate to its already convoluted currency system, allowing investors to trade naira at market-determined rates as it tries to improve dollar supply and lure back the foreign funds who bolted from Africa's biggest economy when capital controls were imposed in 2015.
Those curbs remain in place but are being eased. This week, the naira traded at about 400 to the dollar in the window for investors, similar to its parallel market rate.
Since the move, Lagos stock market has surged to a seven-month high in anticipation of foreigners' return. Local traders say there are more inquiries from abroad about naira-denominated bonds, which yield a juicy 16-18 percent.
Yet there is no real sign investors are actually venturing back into a market where they once held more than $5 billion of debt and accounted for over half of daily stock market dealings.
"You see the CBN (Central Bank of Nigeria) again trying to allow more flexibility with the introduction ... of yet another window for non-oil exporters and portfolio investors," said Giulia Pellegrini, portfolio manager at BlackRock.
She told the Africa Financial Services investment conference in London that with the online platform for the window not yet up and running at many financial institutions, the current system of trading naira over the phone raised questions about price discovery and transparency.
CREDIBILITY
"I can't stress enough the importance of credibility - otherwise investors such as us will very much wait and see before recommitting back to the country with additional flows."
The new window leaves Nigeria with at least six exchange rates: the official rate around 305 per dollar, the black market, a rate for Muslim pilgrims visiting Saudi Arabia, a retail rate set by licensed exchange bureaus and a rate for funding foreign travel and school fees.
Combined capital controls put in place from January 2016 have caused immense problems and contributed to tipping Nigeria into its first recession in a quarter century. The curbs drained at least $10-15 billion of dollar usage from the economy, ratings agency Moody's estimates.
While the latest policy moves have indeed narrowed the divergence between parallel and official rates, dollar liquidity constraints are likely to persist because oil receipts will not rise significantly, Moody's Aurelien Mali wrote in a note.
Crude prices are half what they were in mid-2014 though they have risen from 2016 lows and the government projects 2 percent growth this year.
"Should oil earnings decline again, we expect that the CBN would make associated cuts to FX sales, rather than running down reserves, in order to preserve creditworthiness," Mali said
RECOVERY
The improvement is cyclical rather than structural, owing to recovery in oil earnings, said Mali, who reckons sustainable recovery hinges on foreign investors' return.
A Wednesday bond auction drew no foreign uptake - a contrast with pre-2015 years when non-residents often snapped up half.
Yet there are some encouraging signs. Temi Popoola, Renaissance Capital's Nigeria CEO, said the firm had traded around $50 million in new inflows - 40 percent into equities and 60 percent into bonds - since the new window opened.
However, foreign investors wanted to sell dollars at rates over 400 naira while local traders held out for around 350, he said.
"Internationals want to buy bonds but are not willing to exchange their dollars at the interbank market rate. So only a handful are coming in as of today," Popoola added.
President Muhammadu Buhari, opposed to a weaker naira, is again in London for medical treatment so more currency flexibility is possible. Even if that happens, the naira may not fall by much - RenCap data shows fair value at around 375 per dollar on an inflation-adjusted basis. "It's a step in the right direction but not a proper commitment to a market clearing rate," said Joseph Rohm, managing director of Capetown-based investment firm Adventis.
"We would expect and need to see naira weaken further to a proper market clearing rate before we have confidence to deploy capital back into Nigeria again."
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