Nigerian Dissenters Win JPMorgan Support to Ease Naira Rules

  • Pressure builds on Emefiele to scrap foreign-exchange rules
  • Bonds of largest African economy to leave index by end-October

The voices urging Central Bank of Nigeria Governor Godwin Emefiele to scrap restrictions on foreign-exchange trading and allow the local currency to devalue have just won support from JPMorgan Chase & Co.

The New York-based lender will cut Africa’s largest economy from its local-currency emerging-market bond indexes tracked by more than $200 billion of funds by the end of October, JPMorgan said in a statement on Tuesday, citing a lack of liquidity and limited transparency in the foreign-exchange market. More than $3 billion of Nigerian bonds may be sold because of the exclusion, according to ETM Analytics.

Amid global currency turmoil, Nigeria has stuck with measures to limit dealing and prevent dollars from fleeing the country even as the central banks of China, Vietnam and Kazakhstan devalued exchange rates and oil producers from Russia to Colombia allowed their currencies to depreciate. Emefiele’s determination to stem the naira’s drop has been met with increased calls from local businesses, banks, foreign investors and even members within his own Monetary Policy Committee to ease the regulations.

“The pressure will most certainly be back on the bank to allow the official naira rate to be at a lower, more sustainable level,” Gareth Brickman, a market analyst at ETM in Stamford, Connecticut, said in a e-mailed note on Wednesday. “It had originally been assumed that Nigeria would have until the end of the year to deal with the FX regime issue, but the CBN’s stubbornness to reform appears to have now cost it its credibility with major offshore investors.”

Nigeria introduced an order-based market, whereby banks can only buy dollars when they have backing orders from customers, to stabilize the naira and limit speculation, Ibrahim Mu’azu, a spokesman for the Abuja-based central bank, said in a statement on Tuesday. Removing the rules “would lead to an indeterminate depreciation of the naira,” he said.

At the last MPC meeting on July 23 and 24, several members, including deputy governors Sarah Alade and Joseph Nnanna, said the central bank needed to inject more liquidity into the foreign-exchange market and allow the currency to trade more freely. Over the past few weeks, the chief executive officer of the country’s biggest bank by market value and the head of the stock exchange have called for clarity on the naira.

JPMorgan’s decision “opens the door to more serious, if not outright, capital controls,” Alan Cameron, a London-based economist at Exotix Partners LLP, said in e-mailed comments. “Nigeria will probably become a much tougher sell.”

Record Low

Under Emefiele, appointed in June 2014, the central bank has introduced several foreign-exchange restrictions since December in the face of plummeting prices for oil, which accounts for 90 percent of exports and two-thirds of government revenue.

The naira weakened 20 percent to a record low of 206.32 per dollar in the year through Feb. 12. That spurred extra curbs, slashing trade in the interbank market, which has seen the currency stabilize at an average of 198.93 since the beginning of February. It rose 0.1 percent to 199.02 on Wednesday.

Forwards prices suggest the currency of Africa’s biggest oil producer will drop 18 percent within six months and 25 percent over the next year.

Emefiele repeatedly said that Nigeria wanted to remain in the indexes and that there’s enough liquidity in the currency market for foreigners to buy and sell naira bonds. Average yields on those securities rose 13 basis points to 16.06 percent on Sept. 8, the highest among 18 countries included in the GBI-EM indexes, according to data compiled by Bloomberg.

Equities haven’t been spared either. The Nigerian Stock Exchange All Share Index fell 3.2 percent on Wednesday, the most since Jan. 14. That extended losses from this year’s peak on April 2 to 18 percent. The bourse recorded net foreign outflows of 28.4 billion naira ($143 million) in the seven months through July.

The move will further dent the central bank’s credibility, according to Phillip Blackwood, a managing partner at EM Quest Capital LLP, which advises Sydbank A/S on $3.5 billion of emerging-market debt. The Danish lender sold all its naira bonds in the past year because it felt the currency was overvalued following the central bank’s restrictions, he said.

“It’s a kick in the teeth for them,” Blackwood said by phone from London. “It goes against the view of the central bank governor that it’s all spurious demand for dollars. He won’t look good with this.”

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