Culled—Proshare
February 27, 2017/FDC
Economic Deterioration 2014 – 16
Currency Misalignment
Fair value: N340
· Market premium= 40% of N340
· Parallel market should not trade above market premium + fair value
· i.e approx. N476/$ – target rate for parallel market
Multiple Exchange Rates
Announces new policy on Forex
PTA, medical and school fees to be met at 20% above the IFEM rate i.e N366/$
To reduce the tenor of forward sales from 180 days to 60 days
Boost FX retail outlets at major airports i.e Lagos, Abuja Increase
Increase confidence and efficiency of the FX market
Impact of Policy
Policy partially addresses liquidity problem (#$104m pm)
Does not resolve the confidence crisis in the market
CBN’s aggregate supply to the market
Invisibles= $104m
Tradables=$800m
Σ = $904m
Impact of Policy – According to RENCAP
Upside
An improvement in FX availability
A relatively more flexible FX rate
Downside
FX policy remains interventionist.
No change in the policy of IOCs selling FX to the CBN
CBN remains the biggest FX supplier on the IFEM.
FX market remains fragmented
No mention of restoring the two-way quote system
CBN continues operating fixed FX rate, and simply moves to a new peg.
Impact on Petrol Subsidy… RENCAP
The pump price for a litre of petrol is currently NGN145/litre
Given that the petroleum marketers are currently getting dollars at an FX rate of NGN305/$1
This means NNPC is paying a subsidy of NGN27/l
The NGN145/l petrol price was set assuming the FX rate would not go beyond NGN297/$1.
Total cost for marketers at various FX rates using oil price of $55/bl, NGN/l
CBN Announces new policy on Forex
Gross external reserves approx. $29bn
Net external reserves import cover approx. 6 months
Short term Outlook
Parallel market will appreciate towards N460/$ before bouncing back to N480/$ in a cobweb movement
As BDCs square their positions and cut losses
Demand will grow in the IFEM
Pressure for the CBN to abandon the N305/$ fictional rate will increase
IFEM spot rate will inch up to N320/$
The beginning of a convergence process
External reserves depletion to approx. $27bn in March
Pressure to allow the 41 items to become eligible will intensify
