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Goldman Sachs: Naira Devaluation Not Sufficient Condition for Exchange Rates Unification, Wants Clarity on FX Restrictions

It said $12bn is needed to clear FX backlog  as currency unification jerks public debt to N82 trillion.

Global investment and financial institution, Goldman Sachs Group Inc., has said the devaluation of the naira by the Central Bank of Nigeria (CBN), though necessary, was not a sufficient condition for unifying the official and parallel market exchange rates.
In the same vein,  renowned economist and Managing Director and Chief Executive Officer of Financial Derivatives Company Limited, Bismarck Rewane, yesterday, urged the federal government to implement institutional reforms to augment ongoing monetary and fiscal policy reforms.
This was just as the naira depreciated further yesterday, to N702/$1 on the investors and exporters’ (I & E), lower than the N664.04 to a dollar it closed the previous day.
Although the naira closed at N702/$1 on the I & E FX window, data from FMDQ showed that the highest spot rate recorded was N791/$1.
Also, on the parallel market, the nation’s currency depreciated by  N7 from N755 to a dollar the previous day, to N762 to $1 on Thursday.
The central bank on Wednesday,  collapsed all of its multiple official FX rates into the I&E window.
Goldman Sachs Group noted that while the end-game for monetary/FX policy in Nigeria was still, “quite uncertain, we nonetheless interpret the incremental developments as positive.”
Specifically, Goldman Sachs noted that the apex bank had failed to “provide any clarity on current/capital account FX restrictions that result in a parallel market exchange rate that is weaker than that offered at the official window(s)”.
Goldman Sachs also stated that easing FX restrictions and clearing the FX backlog which it estimated at $12 billion, would be required to achieve a unified naira exchange rate.
It interpreted the recent policy announcements by the CBN as, “significant positive surprises to our and market expectations and as being supportive of a constructive view on sovereign credit”.
However, the institution noted that in the broader FX policy set-up, the CBN failed to “provide any guidance on whether the (historically heavily managed) currency regime would be maintained or if there might be any transition toward a more flexible exchange rate.
“In our view, any FX liberalisation or easing of FX restrictions would entail the need for higher local interest rates to lean against currency depreciation pressure.”
 Goldman Sachs pointed out that it recently examined Nigeria’s external balances, and, “our analysis suggested that at current oil prices, the naira adjustment needed to rebalance the current account into a sustainable surplus would entail a devaluation to around NGN 750 vs. the USD.”
It added: “Beyond official exchange rate windows and current/capital account restrictions, market participants are focused on whether the CBN might introduce changes to the FX policy regime (historically heavily managed).
“We have no guidance from the authorities on their policy preferences with respect to the FX regime. Additionally, following the suspension of former CBN Governor Emefiele, the new administration has not yet made an appointment for a new governor.
“Thus, it remains uncertain whether the CBN will re-peg the currency at a new (weaker) level or might move in the direction of introducing some currency flexibility (in an extreme, a free-float).”
Continuing, the group added, “As we have argued previously, introducing currency flexibility and/or easing restrictions on access to FX would very likely need to be accompanied by higher local interest rates (with prevailing short-term market interest rates currently deeply negative in real terms).
“More broadly, we have been positively surprised by the pace of policy changes announced by the Tinubu administration in the last two weeks since the President’s inauguration, which in our view are supportive of sovereign credit.
“While the end-game for monetary/FX policy still remains quite uncertain, we nonetheless interpret the incremental developments as positive.”
Speaking further, Rewane urged the federal government to implement institutional reforms to support ongoing monetary and fiscal policy reforms.
Rewane said this yesterday when he appeared on the “Global Business Report” a programme on Arise News Channel.
 Speaking on the reform of the country’s FX policy, he said: “It is the beginning of a process of price discovery, and then interaction in the market.  
“Efficient markets evolve and in efficient markets, the invisible hand is the most efficient hand for taking markets into equilibrium.
“The reality is that there are foundational problems and structural problems in the Nigerian economy. So, when you take the structural problems and try to deal with them abruptly, then there would be an adjustment process that follows.
“The announcement is one thing, but the fiscal adjustment process and fundamentally, the mental adjustment to accept that is another. That is where Nigeria is.”
Commenting on the policy direction of President Bola Tinubu, he said the subsidy removal and unification of the exchange rate were commendable.
He, however,  cautioned that it was not possible to have low-interest rates and a strong currency at the same time.
He said: “I heard the president say we must remove subsidies, unify exchange rates, and we must have lower interest rates. You cannot have lower interest rates and a strong currency at the same time.”
Speaking on how the capital market reacted the development in the FX market, he said: “Stock markets are simple, buy on the rumours and sell on the news. I wouldn’t pay too much attention to how the stock market reacts but it is a sign of confidence. The hard work is just beginning.
“When you announce the free-floating of the currency and unification of rates, two minutes later those rates are out of equilibrium already. So, it is the discipline to make sure that the crony capitalist system, the rent-seeking system, and the influence-peddling system are dismantled. The institutional reform is more important than the policy change.”
He added that by adjusting the price to narrow the gap and signaling seriousness,  this would optimise supply in the FX market, encourage “gradual inflow of money and aligning words, deeds, and thoughts to attract sufficient supply without explicitly requesting it.
“There is a demand structure and there is a supply structure. Because the supply was short, and the price was manipulated downwards, there was a gap.
“What you have done really is move the price up so that the demand gap would shrink and translate to an optimisation of supply.
“That doesn’t increase the supply, that is the first move, it is when people see that you are serious, then people would begin to bring money gradually.”
On his part, the Director General/ Chief Executive Officer, Manufacturers Association of Nigeria (MAN), Segun Kadir, while commenting on the exchange rate unification and its impact on manufacturing said: “What has happened is in line with what we anticipated and so this floating has narrowed the gap between the official rate and the parrel rate which we had complained has been inimical to productivity.
“Yes, it has its pros and cons, but it has given us a measure of certainty and we are able to plan better and anticipate what we would require to import our raw materials and machines that are not locally available.
“We believe it is going to create efficiency in the market, it could lead to capital inflow and it could also give us market penetration in other places and improve our participation in the export market. It would be best for us now to export so we can earn dollars and we believe that even foreign investors would look this way.”
Meanwhile, the country’s total public debt stock has increased from N73 trillion to N82 trillion, following the recent currency unification under the administration of President Bola Tinubu.
According to Nairametrics, the conversion of the public debt from dollar to naira led to an increase in total debt, with the naira component rising to N54.3 trillion and the dollar portion decreasing.
However, the actual debt obligations remain in foreign currency.
The increase was due to the conversion of the dollar portion of the debt which is estimated at about $41.6 billion. When adjusted for the most recent exchange rate it converts to N27.6 trillion.
The naira portion of public debt is about N54.3 trillion including Ways and Means which is estimated at about N26.8 trillion.
The stock market of the Nigerian Exchange Limited (NGX) yesterday experienced profit-taking after two consecutive days of bullish momentum with N430 billion loss.
The NGX All Share Index (ASI) was down by 789.89 basis points or 1.32 per cent to close at 59,195.21 basis points from 59,985.10 basis points. Also, market capitalisation declined by N430 billion to close at N32.232 trillion from N32.662 trillion the stock market opened for trading.
The downtrend was impacted by losses recorded in medium and large capitalised stocks, amongst which are; MTN Nigeria Communications (MTNN), Nigerian Breweries, Guaranty Trust Holding Company (GTCO), Zenith Bank and Access Holdings.
As measured by market breadth, market sentiment was negative, as 40 stocks lost relative to 36 gainers. MRS Oil Nigeria, TotalEnergies Marketing Nigeria and Transcorp Hotel recorded the highest price gain of 10 per cent each to close at N68.75, N336.70 and 13.31 respectively, per share. Ikeja Hotel followed with a gain of 9.97 per cent to close at N3.31, while E-Tranzact International rose by 9.92 per cent to close at N5.32, per share.
On the other hand, SUNU Assurance led the losers’ chart by 10 per cent, to close at 45 kobo, per share. Cornerstone Insurance followed with a decline of 9.73 per cent to close at N1.02, while McNichols Consolidated declined by 9.33 per cent to close at 68 kobo, per share.
Access Holdings depreciated by 9.24 per cent to close at N14.25, while RT Briscoe Nigeria declined by 8.82 per cent to close at 31 kobo, per share.
The total volume of trade declined by 9.8 per cent to 1.170 billion units, valued at N15.359 billion, and exchanged in 12,611 deals.
 Transactions in the shares of United Bank for Africa (UBA) topped the activity chart with 192.833 million shares valued at N2.345 billion. Access Holdings followed with 121.538 million shares worth N1.962 billion, while Fidelity Bank traded 102.639 million shares valued at N726.741 million.
GTCO traded 99.848 million shares valued at N3.326 billion, while Sterling Financial Holdings Company sold 79.278 million shares worth N238.315 million.
Trading in the Treasury Bills (T-Bills) secondary market was bearish, as the average yield expanded by two basis points to 6.3 per cent. Across the curve, the average yield expanded at the short end by 12 basis points following sell pressures on the 91-day (35basis points) bill but closed flat at the mid and long segments.

Nume Ekeghe, Kayode Tokede in Lagos and James Emejo in Abuja

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