June 13, 2023/InvestmentOne Report

• At the tail end of last week, the Governor of the CBN, Godwin Emefiele, was suspended from office by the President of Nigeria, Bola Tinubu due to ongoing investigation of his office. In addition to the suspension, Emefiele has been arrested and detained by the State Security Service (SSS) for further investigation. The Governor was however, directed to hand over affairs of the apex bank to Deputy Governor (Operation Directorate), Adebisi Sonubi. Apart from the political drama and complications involved in the arrest, we highlight that this is mostly in line with market expectation and what the President said in his inaugural speech about thorough house cleaning of monetary policy. Over the years, the complex economic policies especially around foreign exchange, with multiple exchange rates in the official market, as well as other unorthodox policies implemented by the Governor proved to be futile as the pressures on local currency exacerbated.
  

• We opine that the suspension of the CBN Governor is supportive of the expected policy reforms and implementation across monetary policy and foreign exchange. In specifics, Wale Edun, an influential member of the President’s advisory board, recently said Nigeria will unify its exchange rates imminently. According to him, the unification process might take some quarters, rather than years. Although the single FX rate to be adopted across board remains unclear (possibly around N650 – 700/$), we reiterate that adequate inflows will be imperative to sustain such rate, and this would require a significant ramp up in oil production, increasing and stable FX reserves, inflows from FPIs, amongst others.
  

• In our view, we expect the unified exchange rate, when implemented, to eliminate the arbitrage opportunities in the parallel market with sufficient supply which will now allow forces of demand and supply to determine a rate that reflects market realities, however, with less volatility. This will foster easier access to FX for all market participant and further curb the FX constraints that has lingered over the years and discouraged foreign investors from the Nigerian investment terrain.

• Although a successful implementation of the foreign exchange rate unification will take some time and require concise effort by the CBN, under a new leadership, our expectation is tilted towards a net positive reaction across the financial markets. The policy should bring about stability in the FX market and reduce the urge to hold the green back for speculative purposes.
  

• Furthermore, the local equities market is expected to rally as foreign investors find their way back to the market given the relatively easier access to FX, particularly when needed for repatriation. We also expect to see improved positive sentiment in the fixed income space, especially in the Eurobond market in line with recent reaction.