New forex regime: Risks, opportunities, by accountants, market operators
The newly adopted flexible exchange rate policy, which operations kicked-off on Monday, may have been described as a mix of risks and opportunities.
Besides, it has been assessed as requiring a careful consideration, not only for borrowers in the banking industry and investors, but other individual activities that are related to foreign exchange (forex).
The Association of Chartered Certified Accountants (ACCA), like other corporate entities, has said that the adoption of a floating exchange rate regime in Nigeria, aimed at liberalising the forex market is a welcome development. The global accountancy body noted that while it believes the decision will result in economic stability with transparent dealings, it needs to be communicated, assuring that will ACCA Nigeria will help its members to have a broad understanding of the policy implications. According to ACCA, while the policy introduced a single forex market, with a fixed dollar rate to be allocated to industries the government deems strategic, immediate analysis and report of the first trading under the new regime indicated a fall in the naira value. ACCA’s Head of Policy for Sub Saharan Africa, Jane Ohadike, said: “Part of the objective of the new framework includes the introduction of the naira to be settled over the counter- OTC FX Futures Market. The aim is to encourage people to plan their future foreign exchange requirements through the use of various hedging instruments as opposed to the current situation where businesses tend to front-load or hoard forex due to uncertainty.
“Accountants need to be abreast of the peculiarities of the rules and regulations surrounding the new forex policy as many of their clients, large and small, will be taking positions that could impact on the reporting of their accounts.”
Capital Market operators have expressed optimism that the new frame work would enable the currency volatility risk to subside, thereby encouraging foreign investors to leverage opportunities in Naira denominated instruments. Already, optimism on the new measure has become evident as indices soared significantly by 7.6 per cent in three trading days last week, with market capitalisation of listed equities rising by N760 billion to N10,044 trillion last week Friday. The All-Share Index, which opened the day at 27, 891.96 rose by 2213.22 points to close at 29,247.27. The Managing Director of GTI Securities Limited, Amos Aledare, explained that the floating of the Naira will see the official rate gravitate more towards the parallel market rate before finding its bearing, since the rate will now be determined by market forces (demand and supply). He noted that this would help to eliminate the incentive to hoard the dollar, which will subsequently increase the dollar supply even from Nigerians. According to him, this would also encourage foreign and local institutional investors like pension fund administrators that have shown considerable apathy for equities investments as a result of the high volatility created by the exodus of foreign portfolio investors.
He added that local retail investors would now approach the stock market for stocks that have very strong fundamentals, in anticipation of the resurgence of the foreign portfolio investors and local institutional investors who will target cheap large cap companies trading at discounts. “The CBN has taken a huge step in the right direction from an investment standpoint. It is our opinion that this new policy is positive for the equities market and will result in the resurgence of the market. As much as we are aware that this policy still requires fiscal responsibility to be effective, we are optimistic that this is the right step for the economy at this time,” he added.
The Head of ACCA Nigeria, Toyin Ademola, assured that ACCA will be watching developments closely – especially in relation to black market trading.
“We have to ask what the long term effect of this change will mean – will it curtail black market trading and will it help the economy to grow and deal with the deficit?
As we have seen with other currency fluctuations – such as the ringgit in Malaysia – there are risks facing businesses when currency volatility reigns – in this 24/7 connect world, business in Nigeria could be affected even if they don’t trade overseas.”
The President, Independent Shareholders Association of Nigeria, Sir Sunny Nwosu explained that the new regime would impact positively on the Nigerian capital market if foreign exchange is made available in the system.
He, however, explained that appointing intermediaries for the foreign exchange market would increase cost, adding that the dealers would want to recover the expenses incurred for the services.
For Ohadike, “it’s a given that any economic policy intervention will have an effect, and the Central Bank has shown optimism that the naira will settle at N250 to the dollar, and anticipates a period of weakness following the floatation, when market forces will clearly come into play. “However, we are pleased to see in the bank’s policy update that there are clear guidelines on effective monitoring of the forex market with all Authorised Dealers and end-users being required to trade only on FMDQ-advised forex trading systems. Compliance is clearly important.” She noted that during this time of policy change and implementation, SMEs and large businesses need to understand the risks and opportunities of such a move, especially if they are importing and exporting.
According to Lukman Otunuga, a currency analyst at FXTM, “the Naira bears received ample encouragement during trading on Monday with prices depreciating more than 40 per cent against the Dollar at N280, following Nigeria’s historic decision to remove the 199 peg.
“Although the Naira could be poised to decline further as the natural forces of supply and demand set an equilibrium price level, this may be beneficial for the nation that has been engrossed in an ongoing battle with faltering oil prices.
“It should be kept in mind that the Naira de-peg could be the first step in attracting foreign investors, boosting domestic import substitution, while potentially abolishing the parallel black market exchange rate.
While there are still concerns over slowing domestic growth, the central bank’s action has boosted overall sentiment, which has consequently sent the Nigerian stock markets surging over eight per cent in local currency terms.
“With domestic petrol prices remaining stable and foreign airlines potentially resuming their flights amid a free floating Naira, there is optimism that economic growth may resume in the long term, despite fears of a technical recession in Q2.
“The Central Bank of Nigeria may need to act fast, as there are still lingering concerns that a weakening Naira could punish the citizens further, while causing inflation to spiral out of control.”