Emefiele Faults JP Morgan’s Report on Nigeria’s Liquidity Position

Emefiele Faults JP Morgan’s Report on Nigeria’s Liquidity Position

• As CBN sells dollars to stem naira’s drop to a record low

The Governor of Central Bank of Nigeria (CBN) Mr. Godwin Emefiele at the weekend dismissed the claim of JPMorgan Chase & Co that there is a lack of liquidity in the Nigerian foreign exchange market, saying the naira is correctly valued and that Nigeria wants to remain in the index.

The apex bank governor was quoted by Bloomberg as saying that “There is no truth in the assertion by the index team that they do not see the liquidity,” adding that “There’s no reason to begin to take a look at” the naira’s value after the central bank devalued the currency in November.”

Nigeria was placed on Index Watch Negative for JPMorgan local currency emerging market indexes on Friday after the central bank measures in December reduced foreign exchange and bond trading; measures the New York-based lender said make it difficult for foreign investors to replicate the gauge.

The governor who spoke ahead of tomorrow’s Monetary Policy Committee meeting in Abuja said the apex bank was not consulted before the release of the JP Morgan’s report. According to him, “We are very surprised at this action by the JPMorgan index team. We want to stay in the index and we’re doing everything to make sure we do.”

Meanwhile, the CBN, on Friday, sold dollars to stem the naira’s drop to a record low after JPMorgan Chase & Co. said the nation’s debt may be cut from its local-currency emerging-market indexes.

According to market report by Bloomberg, the naira depreciated to an all-time low of 188.48 against the dollar Friday. It pared losses after the regulator’s move to trade 0.4 per cent stronger at 185.05 as of 7:35 p.m. in Lagos.

Nigeria’s inclusion in the index will be assessed over the next three to five months, JPMorgan said.

“It would be a big blow” if Africa’s most-populous nation was excluded from the indexes, Adebayo Omogoroye, head of trading at Guaranty Trust, the biggest lender by market value in Nigeria, said by phone from Lagos.

Average yields on naira-denominated government debt soared 2.5 percentage points in the past three months, compared with a drop of 47 basis points through Thursday for emerging-market local-currency securities, according to Bloomberg indexes.

The CBN had limited lenders’ foreign exchange net-open positions to zero from one per cent of shareholders’ funds at the end of each day in December.
It loosened the rule last week by increasing the limit to 0.1 per cent.
Emefiele described the open-position rule as “a moving target based on our view of the liquidity and macro situation. It’s not cast in iron.”

“The central bank will “meet legitimate foreign-exchange demand in the market, not spurious or speculative demand,” he said. “When the banks are unable to, the central bank will intervene to make sure that any investor that wants to go out is able to do so freely, without any hindrance.”

Daily trading volumes for the naira are still just $20 million to $30 million, compared with about $300 million to $500 million six months ago, according to Samir Gadio, head of African strategy at Standard Chartered Plc.

“Sourcing FX has become a nightmare,” Gadio said by phone from London. “Theoretically, there are no capital controls and you can take out whatever you want. But the reality is that it’s much more difficult.”

Commercial banks should source dollars from the central bank if they are struggling to access foreign exchange for their clients, Emefiele said on January 6. The regulator’s monetary policy committee meets on interest rates tomorrow, with a decision set to be announced on Tuesday.

While Nigeria could still keep its GBI-EM status, investors will want the regulator to clarify how it will respond to JPMorgan’s review, Gadio said.
“They’re going to have to take appropriate measures in the coming weeks,” he said.