As N100 Arbitrage Emerges in FX Market, EIU Predicts Return to Dual Exchange Rate Before Year-end

*Argues that CBN lacks experience for floating currency 

*I&E Window: N775.76/$; parallel market: N870/$ 

*FX Unification: MTN, Nestle, Dangote Cement, others suffered N486.82bn losses in H1 

*Tinubu appoints Obazee special investigator for CBN

*Directs him to block further leakages in apex bank

Obinna Chima, Kayode Tokede in Lagos and Deji Elumoye in Abuja

With the arbitrage gap between the Investors and Exporters’ (I&E) and the parallel market widening to about N100 due to foreign exchange (FX) scarcity, the Economic Intelligence Unit (EIU) has predicted that the Central Bank of Nigeria (CBN)  will revert to “heavier management of the exchange rate in late 2023 to tame rapid price rises.”

While the naira closed at N775.76 to a dollar on the I&E window on Friday, it sold at an average of N870 to a dollar at some parallel market points in Lagos, yesterday.
The N100 arbitrage has held for about two weeks now on the back of low FX supply by the CBN. This  is further indication that the wide gap between the I&E window and the parallel market before the FX unification is creeping back.
The EIU, which is an arm of London-based The Economist Magazine, stated this in its Country Report on Nigeria, obtained at the weekend.
Without adequate FX supply and the naira depreciating, petrol prices without subsidy can only go higher. The impending protest and strike by organised labour may further worsen an already dire situation.

However, following the FX rates’ unification,  MTN Nigeria Communication Plc, Nestle Nigeria Plc, among others suffered N486.82 billion foreign exchange losses in half year ended June 30, 2023, which was about 651 per cent from N64.82billion reported in half year ended June 30, 2022.
Also, President Bola Tinubu yesterday, disclosed the appointment of a former Chief Executive Officer of Financial Reporting Council of Nigeria, Mr. Jim Osayande Obazee, as Special Investigator of the CBN and other related entities.

While the letter from Tinubu announcing the appointment of Obazee addressed him as CEO of the FRC, it is worthy to note that he was removed in 2017, and since then the agency has had two other chief executive officers – the late Mr. Daniel Asapokhai and Shuaibu Adamu Ahmed, who is the current CEO.
“So, market participants are confused. Is it Shuaibu Adamu Ahmed, who is the current CEO that Tinubu is referring to or Obazee, a former CEO?” a source who pleaded to remain anonymous asked.

However, THISDAY gathered from reliable sources that Obazee has been working with the Department of State Services (DSS) over the past few months that the agency has been investigating Godwin Emefiele, the suspended CBN Governor.
THISDAY, also learnt that there are plans by the Tinubu’s administration to return Obazee to the FRC. Additionally, with the development, an apparent “house cleaning at CBN” referred to by Tinubu in his inaugural speech, may see all Deputy Governors of the apex bank relieved of their positions.

The CBN unified Nigeria’s multiple exchange rates in June, leading to the sharpest devaluation of the naira in history and a sharp narrowing of the (formerly 60%) spread with the black-market rate, to about three per cent. According to the EIU: “The new exchange rate is classed by the CBN as a ‘managed float’, but there are inconsistencies in application to a more liberal currency regime as foreign-exchange access restrictions still apply to an array of imports. This will unnerve foreign investors, and a backlog of FX orders the CBN failed to clear before opening up the market and deeply negative real interest rates will keep liquidity tight.

“Along with high and rising inflation, the naira will be under significant pressure in the near term. The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time. Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1, from N770:US$1 in early July.
“The CBN (according to official data) has the wherewithal to increase market intervention; 98 per cent of foreign reserves are liquid and import cover is projected at 6 to 8 months in 2023. Based on this we expect the currency to depreciate at a slower rate than fundamentals would imply over the medium to long run, given structurally high inflation.

“The average rate is forecast at N815:US$1 in 2024, sliding to N1,018:US$1 by end-2027, with a spread of 10-15 per cent against the black-market over the period.”
It noted that rapid increases in inflation was expected from June 2023 as the price effects of market reforms transmit immediately into the system, even as it anticipated that the Monetary Policy Committee (MPC) would ramp up a monetary tightening cycle that began in early 2022, starting with the next meeting in late July.

“Interest-rate rises totalling 500 basis points are expected before end-2023, meaning 1,300 basis points will have been added since the cycle began and a peak rate of 23.5% – the highest level since 1993. However, this forecast is caveated with risks; the MPC attaches a large weight to economic growth in its decision-making formula, Mr. Tinubu is opposed to high interest rates and the CBN’s independence is questionable.
“The small size of the financial sector (the private-sector credit/GDP ratio is just 22%) blunts the effectiveness of interest rates in countering inflation. We forecast that the CBN will maintain a tight stance until 2025, by which point disinflation and sustained monetary easing in advanced markets will justify aggressive interest-rate cuts, to 14 per cent by 2026.

“Inflation will at all times be above the nine per cent target ceiling, but the CBN is expected to prioritise stimulus over its price stability mandate,” it added.
The EIU also forecasted Nigeria’s real Gross Domestic Product (GDP) growth to slow to 2.3 per cent in 2023 and 2.5 per cent in 2024, dragged down by rapidly rising inflation and a newly intensified phase of monetary tightening.

“Consumers and businesses will fail to adapt, causing domestic demand to contract for a second and third year running in 2023 and 2024, respectively. In a country with 2.5 per cent population growth this marks an unusually long stretch of decline.
“Headline growth will be kept positive by net exports. Oil export volumes are expected to increase as security in the Niger Delta improves, complemented by the replacement of fuel and chemical imports in 2024 as a new refinery ramps up production,” it added.
In terms of the external sector, it noted that devaluation of the naira would support a widening of the current-account surplus in 2023, to 2.6 per cent of GDP, as import demand was compressed.

However, it anticipated that the current account would remain surplus throughout the forecast period as new refinery capacity reduces the need for imports and rising oil production partly offsets the impact on export earnings of declining world oil prices.
“The surplus is expected to peak at 2.9 per cent of GDP in 2024, before narrowing to 0.2 per cent of GDP in 2027 as lower export prices soften the impact of the new refinery,” it added.

Nestle Nigeria, MTN Nigeria Post Growth in FX Losses

FX Unification: MTN, Nestle, Dangote Cement, Others Suffered N486.82bn FX Losses in H1
MTN Nigeria Communication Plc, Nestle Nigeria Plc, among others suffered N486.82 billlion foreign exchange losses in half year ended June 30, 2023.
Other companies investigated by THISDAY with significant foreign exchange losses in H1 2023 included: Dangote Cement Plc,  BUA Cement Plc, Nigerian Breweries Plc, Cadbury Nigeria Plc, and Eterna Plc.

These firms declared the worst performance in recent years, despite reporting significant increase in revenue.
According to THISDAY’s findings, the companies declared N111.19 billion as combined profit before tax in H1 2023, a 65 per cent decline from the N317.3 billion reported in H1 2022.
Foreign exchange loss on foreign-denominated transactions was due to the material devaluation of the naira in June 2023.
In the period under review, MTN Nigeria declared N131.45 billion net foreign exchange losses, a growth of 864.5 per cent from the N13.63 billion reported in H1 2022.

Amid significant foreign exchange losses, MTN Nigeria declared N200.4 billion profit before tax in H1 2023, a drop of 25.4 per cent from N268.64 billion reported in H1 2022.
The Chief Executive Officer, MTN Nigeria, Mr.  Karl Toriola, in a statement stated that the impact led to the company’s approximately 60 per cent movement in the exchange rate, since the announcement, to N756.24 against the dollar at the end of June 2023 as the market seeks an equilibrium level.
According to him, “The liberalisation of the forex regime and removal of the fuel subsidy provide a clear pathway to the return of international capital into our capital markets, and foreign direct investment which will drive economic activity in the medium term, improve the operating environment, and are net positive for our longer-term outlook.

“The immediate impact on our results for H1 was the unrealised foreign exchange losses included in our net finance charges. There was no material impact on the EBITDA margin due to the nature of our tower contracts, which require us to make quarterly payments at the beginning of each quarter. The exchange rate is adjusted based on the reference rate at the end of the preceding quarter for some of the contracts and the average rate in the quarter for others. As a result, the full impact is expected to kick-in in H2 2023.”

He explained further that the dollar component of operating costs is in the lower 40 per cent.
“Our sensitivity analysis shows that a 10per cent movement in the exchange rate would have a direct negative impact of approximately 1.3pp on the EBITDA margin, pre any mitigation actions. The impact on finance costs in H2 2023 will depend on variations in the exchange rate during the period,” he said.
Another multinational company, Nestle Nigeria reported N123.8billion net foreign exchange loss in H1 2023 from N2.13 billion in H1 2022.
The Fast-Moving Consumer Goods (FMCG) firm closed the period with N69.12 billion loss before tax from N43.74 billion profit before tax reported in corresponding period of 2022.

As Dangote Cement declared N113.63 billion net exchange loss on foreign denominated transactions in H1 2023 from N40.66 billion in H1 2022, its profit before tax stood at N239.86 billion, a decline of 9.4 per cent from N264.89 billion in H1 2022.
The foreign exchange component of Dangote Cement’s loans is N217.4 billion made up of letters of credit as of June 30, 2023, from N158.43 billion reported in full year ended December 31, 2022.

The cement manufacturing company reported N801.26 billion total borrowings as of June 30, 2023, from N706.73 billion in 2022 full year-end.
From the loans breakdown, it explained that, “Bank loans include Letters of credit (LCs) obtained to finance inventories, property, plant and equipment, etc. The average interest rate is SOFR plus 10 per cent.”
Among the top companies affected with the policy was Nigerian Breweries Plc that reported N85.26 billion Net loss on foreign exchange transactions in H1 2023 from N7.28 billion in H1 2022.

The multinational breweries company also declared a loss of N47.6 billion in H1 2023 from N18.74 billion in H1 2022.
Company Secretary, Nigerian Breweries, Uaboi Agbebaku, in a statement said the company ‘s performance was significantly impacted by various factors including the effect of fuel subsidy removal on consumers, naira devaluation and its effect on input cost, and mostly the revaluation of foreign exchange obligations.
“Together with the cash crunch which materially impacted the 1st quarter, the Company’s net loss was escalated in H1. Despite these challenges, we see a positive trend in the results from operating activities (operating profit) which improved by more than 100% in the 2nd quarter versus the same quarter in 2022, driven by pricing, premiumisation, and strong cost management.

“Although the recent policy reforms are having a short-term impact on businesses and consumers, we believe they are beneficial to the long-term growth prospects of the country and the Company. The Board remains committed to creating long-term sustainable value for our Shareholders,” he explained.
Finance expert, and vice president, Highcap Securities Limited, Mr. David Adnori, urged the companies to restructure their foreign currency (FCY) liabilities in a way that enables them to liquidate the liabilities immediately, but simultaneously rebooks them at the current foreign exchange rate.
“With the liabilities liquidated, you realise the foreign exchange losses and deduct it from taxable income.  By doing this, both the government and the shareholders will have to wait until the business normalises,” he said.

 Tinubu Appoints Obazee Special Investigator on CBN and Related Entities

Tinubu has appointed Obazee, as a Special Investigator of the CBN and other related entities.
In a letter addressed to Obazee dated July 28, 2023, which was personally signed by him, Tinubu explained that the appointment of Obazee was in line with his administration’s commitment to fight corruption and in accordance with provisions of section 15 (5) of the 1999 constitution of the Federal Republic of Nigeria (as amended).
While assuring the appointee that terms of his engagement which he said was with immediate effect would soon be made known to him, the president directed Obazee to report directly to him while probing the CBN and related entities using capable team while also blocking further leakages in the CBN and related Government Business Entities (GBEs).

The letter reads: “In accordance with the fundamental objective set forth in Section 15(5) of the Constitution of the Federal Republic of Nigeria 1999 (as amended), this administration is, today, continuing the fight against corruption by appointing you as a Special Investigator, to investigate the CBN and Related Entities. This appointment shall be with immediate effect and you are to report directly to my office.

“The full terms of your engagement as Special Investigator shall be communicated to you in due course but, require that you immediately take steps to ensure the strengthening and probity of key Government Business Entities (GBEs), further block leakages in CBN and related GBEs and provide a comprehensive report on public wealth currently in the hands of corrupt individuals and establishments (whether private or public).

“You are to investigate the CBN and related entities using a suitably experienced, competent and capable team and work with relevant security and anti-corruption agencies to deliver on this assignment. I shall expect a weekly briefing on the progress being made.

“Find attached, herewith, my directive suspending the Governor of the CBN from office with effect from 9th June 2023.”