FPIs fret over Nigeria’s forex risk, mull fund repatriation

By Moses Obajemu

The high prospect of a foreign exchange risk as well as general emerging market risk, which may follow the devaluation of the Chinese currency, Yuan, appears to be triggering anxiety and serious concern among foreign portfolio investors who invested in the Nigerian fixed income securities market.

The trade spat between the United States and China assumed a new dimension Monday last week when China allowed its currency, the yuan to weaken past the key 7-per-dollar level for the first time in more than a decade. Beijing later said it would stop buying U.S. agricultural products, inflaming a yearlong trade war with the United States. This was in response to President Trump slamming 10 percent tariff on additional $300 billion Chinese products.

Indications emerged at the weekend that foreign portfolio investors (FPIs) in Nigeria have been trying to repatriate their funds back home to avoid being trapped in a foreign exchange crisis. Already, they are said to be trying everything just to exit the Nigeria market, multiple analysts told business a.m.

Femi Ogundimu, fixed income securities trader at Access Bank Plc, said there is a risk of foreign portfolio investors, who are currently in Nigeria’s investment space, trying to leave considering the volatility that could hit the foreign exchange market.

“That is what has resulted in the bearish sentiment that you have seen in the money market, with foreign portfolio investors trying to exit the market even at whatever cost. And, of course, the CBN has been defending the currency. You will also notice that there has been increase in demands; however, the CBN has comfortably dealt with the demands,” he said.

“On the foreign exchange side, the forex demand is rising as banks don’t have enough to fund the repatriation of funds by the foreign investors but the CBN is coming into that market and levelling every uncertainty that could arise from that market,” Ogundimu added.

The Central Bank of Nigeria intervened in the forex market last week by injecting $210 million into the market to meet growing demand for forex.

In June 2018, Nigeria and China entered into a swap deal agreement which allows both the CBN and Peoples Bank of China to swap a maximum amount of fifteen billion renminbi/Chinese yuan (CNY 15 Billion) for seven hundred and twenty billion naira (N720 billion).

This amount is equivalent to $2.5 billion using an exchange rate of N305: $1.

As provided in the regulations, the currency swap agreement was purposely executed to:

•    finance trade and investment between China and Nigeria;

•    maintain financial market stability; and

•    facilitate other connected purposes as may be agreed upon by both countries.

Essentially, the currency swap agreement seeks to create a platform that provides naira liquidity to Chinese firms and investors looking to do business with Nigeria on the one hand; and also provides Chinese yuan liquidity to Nigerian firms and investors looking to do business with China on the other hand. The currency swap agreement is designed to aid trade transactions between China and Nigeria and remove the need to first source for the “greenback” (US dollars) before payments for transactions involving the two countries can be made.

Analysts say now that the Yuan has been devalued, importing goods from China becomes cheaper. For Nigeria, an import-dependent economy with a rich taste for exotic products, this may promote massive Chinese imports and cause pressure on the naira.