…As Foreign capital inflows rise to $4.15b***
Fitch rating agency has disclosed that Nigerian banks plan to report the foreign currency items in their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate instead of the official exchange rate.
In a statement yesterday, the rating agency said that banks’ move to a more market-based presentation of foreign-currency assets, liabilities and profit-and-loss items will give a pragmatic representation of their foreign currency positions.
It stated: “Our discussions with banks that we rate suggest that most will publish their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate (about N330/USD) instead of the official exchange rate of N305/USD, which they previously used.
“Financial statements with foreign currency items translated more in line with market exchange rates will give a more realistic representation of banks’ foreign currency positions and capital at risk from potential further depreciation of the naira.
Exchange-rate risk warrants scrutiny for Nigerian banks because about 40 percent of assets and liabilities in Nigeria’s banking sector are denominated in US dollars and not all banks operate with matched foreign currency positions.” However, the credit rating agency opined that NiFEX in itself is not the true market exchange rate.
It recommended that the Nigerian Autonomous Foreign Exchange Rate (NAFEX) is the closest to the real market rate. According to Fitch, “adopting the NiFEX rate is, however, only a partial step towards using market exchange rates.
IFRS guidelines say that companies operating in countries with multiple exchange rates should translate their FC assets and liabilities into local currency based on the exchange rates at which they expect to settle them. But the guidelines leave scope for considerable judgement and flexibility, and Nigeria operates with multiple exchange rates, which adds to the confusion “In our view, the exchange rate used under the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism is the closest to a true market rate.
NAFEX was introduced last year and rates are set by market participants, giving investors and exporters a more transparent way to sell foreign currency. NAFEX attracts greater volumes than other exchange mechanisms.”
Meanwhile, foreign capital inflows into the economy rose by 148 per cent to $4.15 billion, according to a report released yesterday.
The Financial Derivatives Monthly Economic Update titled: “Hot Money: Foreign Direct Investment and the Central Bank of Nigeria’s Monetary Policy” attributed the increase to renewed investors’ confidence in the economy.
It said a further breakdown showed that foreign portfolio investment (FPI) — hot money —accounted for 67 per cent of inflows; foreign direct investment (FDI) and others accounted for the rest.
The report said policy makers were wary of relying on FPIs because they are considered to be highly volatile and politically sensitive. “Some nations have restricted the tenor of FPIs to a minimum stay of three years. In 2018, with the expectant increase in US interest rates, these investments could be subject to capital flow reversals. In the run-up to a general election, any outward investment flows could be debilitating,” the report said.
It said with oil prices rising by 17 per cent since 2017’s average, staying at current levels, means oil revenues may help mitigate the consequences of any form of capital flight.
The Monetary Policy Committee (MPC), it said, voted in May 2016 to adopt greater flexibility in exchange rate policy and held other monetary policy parameters un-changed. “This was the first in a sequence of monetary policies aimed at salvaging a near-crisis situation in the foreign exchange (forex) market.
The situation in the forex market was occasioned by a steep fall in global oil prices and domestic oil production shocks, and was exacerbated by economic policy inertia,” it said.
It said the euphoria surrounding the flexible ex-change rate and higher interest rate was short-lived as capital imported in fourth quarter of 2016 declined by 15 per cent to $1.55 billion and was followed by a 41.36 per cent fall in capital imported in first quarter to $908.27 million.
“This was largely due to the skepticism about the flexible forex policy and investors’ apprehension about the huge disparity between the interbank forex rate and the parallel market rate.
This trend continued until the Investors Export Foreign Exchange window (IEFX) was launched in late April 2017. The IEFX boosted liquidity in the forex market, calmed the frayed nerves of foreign investors and supported the convergence of exchange rates,” it said.
It said the introduction of the IEFX window in late April 2017 is arguably the most important policy implemented by the CBN in 2017. It said prior to the introduction of the IEFX, foreign portfolio investors, particularly those repatriating funds from Nigeria, were concerned about the multiple ex-change rates in the country.
There was a huge gap be-tween the official exchange rate and the parallel market exchange rate, plus an opaqueness in the foreign ex-change management system (which caused uncertainty), and the acute scarcity of hard currency. Consequently, there was an exodus of foreign capital and little or no new investments into the country.
Vanguard with additional report from Nation