Things are really looking up in Nigeria’s capital market. Within two weeks, the market has reversed the losses incurred in the last two years. Between April 2015 and April 2017, the market capitalization of the Nigerian Stock Exchange (NSE) plummeted by close to N2 trillion. It was probably the greatest loss after the tragedy of the insider dealings engendered by the banking industry in 2008 when the capitalization of the NSE tumbled from an all-time high of N13 trillion to N8 trillion.
On one frenzied day last week, the market capitalization of the NSE surged by a record N417 billion as investors scrambled to take positions in grossly under-priced stocks. By last Friday, the capitalization of the NSE had surged from the N9 trillion range two weeks ago to N11.5 trillion.
Laggards like FBN Holdings and Diamond Bank suddenly became investors’ delight. From a record low of N3.60, FBN share price sailed pretty close to N7 within two weeks.
The massive gains in the NSE clearly testify to the success of CBN’s reforms in the foreign exchange market. The liquidity squeeze in the forex market in the last 12 months was responsible for the persistent bearish trend in the capital market. The dearth of hard currency trapped millions of dollars in dividend pay out to foreign portfolio investors.
They responded to the inability to repatriate their earnings by dumping their shares and fleeing the system. Since the commencement of the intervention process in the forex market in February, the CBN has injected close to $3 billion into the system.
Now investors are confident that the CBN is willing to fund the market, thus making it easier to repatriate dividends and capital gains. That perception is responsible for the bullish trend in the market in the last two weeks. Foreign portfolio investors were reluctant to take positions in the market in the first three months of CBN intervention which started in February, because the apex bank had not addressed the issue of repatriation of dividends in the forex market. Now that the investors are convinced that they could repatriate their dividends and capital gains, they have taken the plunge that sustains the bullish trend in the NSE. Last week alone, the capitalization of the NSE surged by a record N658 billion.
The CBN intervention in the capital market is able to conjure the massive gains in the capital market because it has gone beyond the traditional posture of dumping money in the forex market without addressing the holes that greedy bankers, bureau de change (BDC) operators and forex end-users normally exploit.
Guidelines for forex purchase is now so stringent that even as the apex bank has increased the frequency of forex supply to BDC operators, some of them could not bid for it in some weeks because speculative demand no longer pays.
The biometric verification number (BVN) introduced by the apex bank in June 2015 is one of the powerful instruments checking the excesses of forex fraudsters.
Before BVN became operational, depositors with multiple accounts in different banks could make speculative demands for forex with different accounts, get the forex and round-trip it at a huge margin. BVN has ended all that.
However, despite the spectacular gains of the CBN forex reforms, multiple exchange rates in the country’s forex market remain a major hindrance to the inflow of foreign direct investments. The reforms have so far reduced the margin between the official and parallel market rates significantly. At the beginning of CBN intervention, the naira was trading at the parallel market at a humiliating rate of N520 to the dollar while the CBN fixed the official rate at N306. That left an all-time high premium of N214 per dollar.
At the close of business on Friday, the naira traded at N365 to the dollar at the parallel market, while BDC rate was N360. The margin between the parallel market and BDC rates plunged to a scant N5 per dollar. The two could easily merge. However, a margin of N60 between parallel and official market rates remains a debilitating scar. The tacticians in the CBN exchange rate war room might be gloating over the perception that as attractive as the margin between official and parallel market rates appear, no one would benefit from it because most of the leakages have been plugged.
That claim is highly contestable. Even in the absence of leakages, the wide margin inhibits foreign direct investments and makes the apex bank the only one funding the forex market. The economy is the prime loser.
The danger with CBN single-handed funding of the forex market is that if oil price and production rate plummet again, the naira would tumble precipitously.
Foreign investors believe that the parallel market portrays a clearer picture of the purchasing power of the naira than the fixed official rate. The truth however lies some way between the two rates.
With the checks mounted by the CBN, if market forces are allowed to determine the official exchange rate of the naira, it might fluctuate around N320 to the dollar. That should not scare anyone.
The CBN might be stretching its luck too far by hoping that the two rates would merge without the dictates of market forces.The CBN intervention in the capital market is able to conjure the massive gains in the capital market because it has gone beyond the traditional posture of dumping money in the forex market without addressing the holes that greedy bankers, bureau de change (BDC) operators and forex end-users normally exploit