The Nigerian Exchange Group, in partnership with sponsors such as international banks and CardinalStone, organized an investor call that provided a platform for the Central Bank of Nigeria (CBN) to engage foreign portfolio investors today, February 29, 2024. The key highlights of the engagements are as stated below:
• The CBN is committed to clearing all outstanding FX backlogs in the next few days. These backlogs were linked to five banks. At the last MPC meeting, the CBN had already disclosed that a further $400 million of the outstanding $2.2 billion was recently cleared. Hence, by inference, the balance to be cleared may be linked to the remaining $1.8 billion.
• The CBN reiterated that the Naira is undervalued and that the current FX pressures are linked to panic, which is driving hurried monetization of assets. The CBN anticipates that the Naira will stabilize in the near term, supported by the recent action of the NNPC to move some of its accounts to the CBN. This stability is also expected to be supported by foreign inflows ($2.0 billion YTD vs $3.0 billion for the whole of 2023).
• The CBN has prioritized developing a functional foreign exchange market with robust supply.
• The apex bank noted that the interest rate trajectory is biased to the upside. The CBN guided to higher stop rates at coming OMO and NTB auctions. In particular, he noted that the stop rates are expected to edge closer to the MPR (22.75%).
• The CBN plans to increase OMO frequency and volumes to mop up liquidity and provide investment opportunities for FPIs.
• The CBN will stop at nothing to tame the current inflation and also ensure price stability. Importantly, the Governor of the CBN explained that the apex bank has a clear understanding of the drivers of inflation, which includes currency pressures.
• The CBN assured that it will supply and intervene in the market whenever there are distortions. The CBN also guaranteed that it would work to ensure that there is ample liquidity for free entry and exit for foreign portfolio investors. It considered this a priority in the near term.
• The CBN plans to drive policy effectiveness and has indicated that current policies are well thought out. It also noted that corrective measures will be quickly deployed in the event of any wrong policy outcome.
• The effective CRR before the recent increase was about 40.0%, with those of a few banks exceeding 45.0%. Hence, some banks are going to get refunds under the new CRR regime, while others will be required to make payments. The net effect of the new CRR is about N5.0 trillion (debit to the system). However, the mop-up will be done gradually to avoid causing shock to the financial system.
Our view
We think that the CBN’s recent efforts to restore market confidence and enhance communication with investors are likely to boost the investment case of Nigeria. Specifically, efforts to clear the balance of existing backlogs, sanitize the FX ecosystem, and improve carry trade could attract more foreign interest.
We see scope for higher-for-longer interest rates in the domestic market, which could drive fixed-income fund managers into a short-duration strategy. In the equities space, higher interest rates could depress valuations. However, savvy investors could prioritize allocations to stocks with strong positive earnings correlation to interest rates (such as banks), high dividend income, and low leverage.
Regards,
CardinalStone Research
research@cardinalstone.com