CBN Kicks off OTC FX Futures as Buhari Restates Opposition to Devaluation

• Oil marketers mull dialogue on special FX window

Tobi Soniyi in Abuja, Goddy Egene and Obinna Chima in Lagos

Despite the plaudits Nigeria has received from the local and international business community on the removal of its currency peg and attained recorded by the Central Bank of Nigeria (CBN) monday in the foreign exchange (FX) market when it became the pioneer seller on the Naira-settled Over-the-Counter (OTC) FX Futures contracts on the FMDQ OTC Securities Exchange, President Muhammadu Buhari doubled down on his opposition to the devaluation of the naira, stating that he was yet to be persuaded by its proponents.

Unmindful of the impact his statement could have on the financial markets, Buhari while breaking the Ramadan fast with members of the business community at the State House, Abuja, insisted that he did not see any benefit that the country would derive from devaluing the naira.

Buhari, last February at the opening session of the Africa 2016: Business for Africa, Egypt and the World at Sharm El-Sheikh, Egypt, had said he was not in support of the devaluation of the naira, saying Nigeria, which is not an exporting nation, would be worst hit if the local currency was devalued.

Also in March, in Kenya, while addressing Nigerians in that country, he said he won’t “kill the naira”. The presidency had also issued statements denouncing devaluation.

However, the public was led to believe that the president had softened his stance, when he endorsed the CBN’s decision to introduce a flexible FX regime, which saw the naira fall by over 45 per cent on the spot market last week when the local currency was floated.

But at the breaking of the Ramadan fast dinner with the business executives yesterday, Buhari asked: “How much benefit have we derived from the naira devaluation in the past?

“I don’t like the returns I get from the CBN because that coupled with the demand that let us devalue the naria. In August 1985 the naira was N1.30 to a dollar but now you need N300 or N350 to a dollar. What do we derive from that?

“How much benefit can we derive from this ruthless devaluation of the naira? I’m not an economist, neither am I a businessman, but I fail to appreciate what the economic rational is.

“What has happened to us now is that we have maneuvered ourselves into a mono-economy which led to the collapse we are seeing now.”

The president told his audience that the responsibility was on their shoulders to help get the economy out of the woods and generate jobs for the unemployed.

“A lot of responsibilities now fall on your shoulders. You have a lot of investments, a lot of people you can employ.”

Buhari said as part of plans to diversify the economy, 13 states had been identified that could produce rice that would feed the nation in 18 months.

The president said it was disappointing that Nigeria imported things like tomato, rice and wheat, among others, that can be produced in the country.

Giving a vote of thanks on behalf of the group, the Chairman of Unilever, Kola Jamodu pledged the support of the business community to the Buhari administration as it strives to take the Nigerian economy out of the woods.

He said: “We are with you as you strive to reposition the Nigerian economy. We are very much in support of your move to diversify the economy.

“I have the mandate of the group that we will give you all the support, because if the economy is in disarray, the private sector cannot survive.”

Among those who attended the dinner were the President of Dangote Group, Aliko Dangote; Chairman of United Bank for Africa (UBA) Plc, Tony Elumelu; Chairman of Forte Oil Plc, Femi Otedola; Chief Executive Officer of Oando Plc, Wale Tinubu; Chairman of Zenith Bank Plc, Jim Ovia; Chairman of Jaiz Bank, Umar Mutallab; and Vice Chairperson of Famfa Oil, Mrs, Folorunsho Alakija, among others.

Meanwhile, the CBN had in its guidelines for the OTC FX Futures trading stated that it would kick off the market by acting as the seller of OTC FX Futures contracts for defined tenors of 1-month, 2-months, 3-months, 6-months, 9-months, 12-months, 18-months and 24-months.

To this end, the CBN yesterday sold naira-settled OTC FX Futures contracts of non-standardised amounts for different tenors from one month through to 12 months which will settle on bespoke maturity dates, providing liquidity in the product that will enable corporate treasurers effectively and efficiently manage their FX risk.

At the end of trading yesterday, OTC FX Futures rates of N/$ July 2016 (1-month) stood at N279/$1; the N/$Aug 2016 (2-months) rate at N277/$1; N/$ September 2016 rate at N275/$1; October 2016 – N267/$1; November 2016 – N260/ $1; and December 2016 – N250/$1.

Also, the OTC FX Futures rate for January 2017 was N243/$1; February 2017 – N236/$1; April 2017 – N210/$1; May 2017 – N230/$1 and June 2017 at N225/$1.

The OTC FX Futures comes exactly one week after the two-way quote trading commenced in the FX market.

Speaking during the unveiling of the market, Managing Director/CEO of FMDQ, Mr. Bola Onadele, said the naira-settled OTC FX Futures product was a major milestone in the evolution of Nigerian financial markets.

“The futures market is an opportunity to transform risk into certainty – a major paradigm shift in the financial markets landscape. This innovation provides opportunities for government, businesses, pension fund administrators, investors, individuals, etc., to hedge (not speculate), cope with exchange rate risk.

“It also affords the CBN a greater opportunity to manage exchange rate volatility, thus achieving greater market confidence, liquidity, improvement in business planning, job security, employment, better allocation of resources, global competitiveness of the Nigerian financial markets, and all in all, a thriving economy,” Onadele said.

In order to ensure credibility of the contracts, especially at maturity, the spot FX rate will be the FMDQ spot FX rate benchmark.

Onadele pointed out that the naira-settled OTC FX Futures product, whilst it is of tremendous benefit to Nigerian corporates, was equally of immense importance and advantage to, among others, the CBN, the Nigerian FX market, and the nation’s economy as a whole.

The OTC FX Futures market will serve to minimise the disequilibrium in the spot FX market and cause the rate to moderate; attract significant capital flows to the Nigerian fixed income and equity markets; and achieve exchange rate stability.

With this, there will be no need to front-load FX requirements, which puts immense pressure on and distorts the spot FX rate.

Also, corporate treasurers are better able to make judgments on when to access the spot FX market, managing more effectively, their liquidity positions. It also makes it easier for dollar demand by end-users to be staggered appropriately, as there will be no requirement for panic-buying as end users are guaranteed a fixed rate for their FX needs when required.

CBN Governor, Mr. Godwin Emefiele, who was represented by his Special Adviser on Financial Markets, Mr. Emmanuel Ukeje, said the central bank remained steadfast in its purpose to position the Nigerian FX market to be competitive, transparent, liquid and diversified, thereby ensuring the requisite fundamentals that make for a thriving economy.

“The launch of the first Naira-settled OTC FX Futures contracts demonstrate this intent in a significant way, and I am honoured that the CBN is able to pave the way for what I believe will be an important innovation in Nigeria’s financial markets,” the CBN governor said.

On her part, FMDQ Chairman and CBN Deputy Governor (Economic Policy), Dr. Sarah Alade, said: “Today, the Nigeria’s financial market is celebrating a significant milestone, as the CBN launches its first set of OTC FX Futures quotes on the FMDQ OTC Securities Exchange.

“This innovative product will bring liquidity, transparency, price formation and diversification into the FX market, making the market globally competitive.

“FMDQ, the market organiser and the OTC FX Futures exchange, in collaboration with the CBN and other stakeholders, are adequately equipped to deliver the needed transformation in the Nigerian financial market.

“I am very proud to be part of these two institutions that made this day possible.”

The President, Nigerian Stock Exchange (NSE), Mr. Aigboje Aig-Imoukhuede, commended the CBN for the initiative, saying that it would enthrone transparency in the market.

“History has proven me right that market-based systems are the most efficient in resource allocation. Platforms like this represent our future and Nigerian financial markets are taking a big leap,” the former Access Bank boss said.

Also, a board member of the FMDQ and Country Treasurer, Citibank, Mr. Bayo Adeyemo, said the OTC FX Futures would help improve confidence in the FX market.

“This would help improve the integrity of the market and minimise the risk of doing transactions. It means that as market participants, we would continue to improve and educate ourselves on developments in the market,” Adeyemo added.

On the interbank FX spot market, the naira closed at N281.49 to a dollar as the central bank continued to intervene in its bid to stabilise the market and attract FX liquidity. The market traded a total volume of $32 million before it closed.

On the parallel market, however, the naira closed at N351/$1, weaker than N345/$1 at which it sold on Saturday.

But as the CBN kicked off trading on the OTC FX Futures market, there were indications yesterday that petroleum marketers in the country may initiate discussions with it for the creation a special window to sell foreign exchange (FX) to them at the previous official rate of N197-199 to the dollar.

The move is to enable the oil marketers cover their open trade positions.

Another option being considered by the oil marketers is to meet the Finance Ministry to provide naira for them to buy FX at the prevailing rate.

Renaissance Capital Limited, a financial advisory firm, disclosed this in a report titled: “Nigerian Banks -Life after ’40” which was released yesterday.

According to the report, the sharp move to N280/$, implied FX differential losses for petroleum marketers, some of which, “we understand from our discussions with the banks, declined to be locked into forward contracts”.

As a result of this, the report anticipates non-performing loan (NPL) pressure for banks, on the back of a weaker naira.

“Prior to the depreciation, the backlog of petroleum marketers’ FX demand was estimated by one of the banks at $2 billion; at a N285/$ exchange rate, this implies an FX loss of N170bn/$596 million. We think resolving this issue will be critical to help avoid another round of fuel queues and sharp impairment growth for the banks.

“In some cases, particularly for the larger operators, we could see the banks restructure the repayment terms over a longer period of time to allow the marketers to trade out their losses.

“For banks that have sizeable FX NPLs, depreciation could hurt their NPL ratios. Had they been holding the requisite provisions on these NPLs in naira, that would put significant pressure on their provisions and coverage ratios, as they need to set aside more naira to maintain coverage ratios at the pre-depreciation level.

“For the banks that held the provisions in dollars, these dollar provisions would naturally inflate at a weaker exchange rate, but the banks do not need to set aside real naira in order to maintain coverage ratios,” it added.

Based on feedback from management, the report pointed out that FBN Holdings and Diamond Bank have the highest proportion of their NPL books in foreign currency – at 56 per cent and 45-50 per cent, respectively – with Diamond Bank mentioning that it holds its provisions in naira.

These sizable FX NPLs, Rencap stated were a source of concern for them.

“But, unlike Diamond Bank, FBN Holdings has significant FX long positions that should help it to partly offset the impact of some of these asset quality challenges.

“While banks with a larger naira NPL book face less of a problem in this regard, we expect prudence to lead to an increase in collective impairments, as weak macro conditions put a strain on the performance of their loans,” it added.