What Investors Need to Know About Nigeria's Exchange Window

  • Naira weakens in early days of trading with light volume
  • So far, central bank has held off on intervening to stem slide

There’s a lot riding on Nigeria’s new foreign-exchange platform.

The system -- called the Investors’ and Exporters’ FX Window -- is the central bank’s latest attempt to lure back traders who fled in the past two years. The idea is that by creating a market for some types of investment transactions, policy makers can satisfy calls to float the currency without risking an inflationary spiral that may come from a devaluation. Eventually, it would attract foreign funds and alleviate a shortage of dollars.

While analysts warn that it may be weeks before they’ll have a clear idea of how it’s functioning, here is what traders need to know:

What is it?

Nigeria, unlike other crude exporters such as Russia, Colombia and Kazakhstan, has tried to prevent its currency from depreciating since oil prices began falling in 2014 through a combination of trading controls, import restrictions and even a peg. Central bank Governor Godwin Emefiele and President Muhammadu Buhari have stood against a free float of the naira’s interbank rate, saying it would only cause prices to rise.

The window dodges that by offering investors a separate market in which, at least according to what Emefiele told bankers in recent weeks, they’ll be able to trade the currency much more freely. On Tuesday, he told reporters that authorities will make sure prices move “based on the managed-float regime that we run” while also saying that if there are willing buyer and sellers, “there will be no form of any price intervention.”

Eligible transactions include those for loan repayments, interest payments, capital repatriation and remittances. Those allowed to sell hard currency are banks, portfolio investors, exporters and the central bank.

How will it work?

FMDQ OTC Securities Exchange, the Lagos-based trading platform overseen by the central bank, will publish opening and closing rates for the market at 9 a.m. and 4 p.m. These will be based on a poll of authorized bank dealers. It will also announce a fixing rate around noon, known as the Nigerian Autonomous Foreign Exchange Rate Fixing, or NAFEX. This will serve as a benchmark for derivatives including futures and forwards.

Trades will be done over the phone, though the central bank hopes to use an electronic system eventually. Banks will still require the Abuja-based regulator’s permission to buy and sell currencies with one another, and they’ll be restricted to existing limits on trading positions.

What’s happened so far?

Though there’s been little trading, the central bank has been true to its word in letting the naira depreciate. FMDQ announced the first closing rate on Monday at 377.11 per dollar, 16 percent weaker than the interbank rate of around 315 and almost as low as the rate of 388 in the black market that Nigerians use when they can’t access dollars through official channels. Wednesday’s opening rate was 378.54.

The central bank sold $25 million in the exchange window on Tuesday, Lagos-based ThisDay newspaper reported, citing a statement from the regulator.

What could go wrong?

The main concern among investors is that the central bank changes its stance and tries to manipulate the exchange rate, which would discourage traders from using the window. Last June, it promised a free float after devaluing the naira, but the rate has remained about 315 since August, even as the naira plummeted on the black market.

It’s also unclear if oil companies, responsible for about 90 percent of Nigeria’s export earnings, will be able to use the window. If they aren’t allowed to sell dollars, that could leave the central bank as the main supplier and remove a major source of liquidity.

“Market participants that have been waiting patiently on the sidelines are likely to remain on the sidelines until it is clear that naira valuations and liquidity can be sustained,” said Adriaan du Toit, a fixed-income strategist for Citigroup Inc. in Johannesburg. “Naira liberalization has been a piecemeal process, and we think the latest development is another step forward. But we are not convinced that it is a groundbreaking leap.”

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