Redemption of $3.5b forwards contract to test CBN’s forex rule

• One-month deal nears maturity
• Economic indices sustain slide as recession looms

Renewed attention has been turned on the Central Bank of Nigeria over its ability to fulfill the $3.5 billion forwards contract executed on the first trading under the flexible exchange rate regime.

Besides, as the one-month forwards component of the $3.5 billion, estimated at about $697 million nears redemption date, stakeholders have said its success will serve as confidence booster to the new system and an attraction for investors.

The forwards contract also included an estimated $1.22 billion for two months and $1.57 billion due in three months, in order to clear a backlog of $4.02 billion of demand.

Despite the apex bank’s daily interventions at the interbank foreign exchange market since the new system started, the country’s reserves have remained stable at $26.3 billion for the last one month.

Analysts at Afrinvest Securities Limited said: “We believe that the ability of the CBN to fulfil the $3.5 billion forward commitments in June will massively boost confidence levels in the Nigerian foreign exchange (forex) market.”

Last week, the parallel market had remained quiet as the Naira was stable, trading at N352.00/US$1.00 on all days of the week.

“The market is expected to stay soft in the week ahead in the absence to autonomous supplies and guided trading band in the new interbank market. We also expect rate at the parallel market to trend circa current levels,” the analysts said.

Also last week, activities at the interbank foreign exchange market was quiet, although liquidity concerns linger, while spot rate and one-year forward remained unchanged on both trading days of the week, closing at N282.02/ $ and N317.82/$ respectively.

Although the fixed income market traded only on Monday and Friday as a result of the national holiday declared by the Federal Government, the financial system liquidity had opened the week at N330 billion causing the Open Buy Back (OBB) rate to rise to 4.6 per cent and Overnight at five per cent at the close of trade on Monday.

But on Friday, the monetary authority embarked on liquidity mop up, auctioning treasury bills worth of N28 billion; N42 billion; and N120 billion for 91-day, 182-day and the 364-day maturities.

Cumulatively worth N190 billion, these securities instruments were auctioned at 9.98 per cent, 12.24 per cent and 14.99 per cent stop rates respectively.

Consequently, the significant liquidity tightening effect caused a spike in the OBB and Overnight rates, which rose to nine per cent and 9.4 per cent on Friday.

“The market was trading around 10 percent for Overnight placement prior to the sale of treasury bills, but rose sharply to an average of 15 percent shortly after the result of the auction was announced,” one dealer said.

Nigeria’s financial market was closed for trading from Tuesday to Thursday for a public holiday.

Traders said interest rate should open next week around same level of 15 percent, but could ease a little with the expectations of injection of about N73 billion worth of matured treasury bills and payment of debt to government contractors, according to Reuters.

Also, the treasury bills market, which averaged 9.4 per cent for the past one week, as investors awaited the auction, rose by 0.6 per cent to close the week at 10 per cent.

Similarly, the Debt Management Office (DMO) barring any last minute change, will this week, auction N40 billion new bond issue– JULY 2021 and N40 billion each of the JAN 2026 and MAR 2036 bond instruments.

Already, trading sentiment in the first half of 2016 was mostly guided by heightened inflationary pressure and foreign exchange risk factors.

Meanwhile, ahead of the release of second quarter Gross Domestic Product figures, the respective individual economic indices that make up the report has continued the downward movement, raising concerns that the recession is fast becoming a reality for the country.

Besides, the real sector performance in terms of production has dipped further, with sub-sectorial output declining at faster rate in the build up to the decisive moments for the country’s economy.

Already, the Purchasing Managers Index, a monthly survey of economic activities for manufacturing and non-manufacturing organizations, has recorded a sixth monthly negative production level new orders; employment; inventories; and general business operations.

Specifically, the manufacturing index dropped to 41.9 index points in June 2016, compared to 45.8 in the preceding   month implying that the sector declined   at   a   faster   rate   during   the   review   period.

Of  the 16 manufacturing   sub-sectors, 14 recorded   decline   in   the   review   month, among which are fabricated   metal   products; chemical   and   pharmaceutical products; printing   and   related   support   activities; food, beverage   and tobacco   products; cement; plastics   and   rubber   products; and textile, apparel, leather   and   footwear.

At   40.2   index   points, the   production   level   index   for   manufacturing   sector   declined   for   the   sixth   consecutive month and at faster rate compared to May record 47.9 points, with 12 out of the 16 sub-sectors being in the sliding profile.

The new orders index also declined for the sixth consecutive month at 37 points, yet at faster rate when   compared   to   42.7 points   in   May, with 13 sub-sectors in the negative record.

The   development is not unconnected with the lingering foreign exchange crisis, which limited access has affected the volume and frequency of orders.

Similarly, the employment   level   index   in   the   month   of   June   2016   stood   at   42.2   points, indicating   for   16 consecutive   months, and also at faster rate   when   compared with 45.7 points in the preceding month. About 12 sub-sectors recorded declines.

Also, at 39.4 index points, the raw materials inventory index declined for the sixth consecutive month in the   review   period, but still at faster rate   when   compared   with 43.9 points of the   previous   month. This is also related to foreign exchange crisis.

For the non‐manufacturing sector, the indices recorded   the sixth consecutive month decline at   42.3   points, indicating   a   faster   decline   compared   to   that   in   May.

Of   the   18   non-manufacturing   sub-sectors, 14 recorded   decline   in   June   2016 and prominent among are finance   and insurance; management   of companies; utilities; accommodation   and food   services; real   estate, rental   and   leasing; electricity, gas, steam   and   air   conditioning   supply; wholesale   trade; public   administration; and entertainment and recreation.

The general business activities scored low too at 40.2 index points, falling for the sixth consecutive month in June 2016 from 44.3 points in May, with 14 of the 18 sub-sectors   recording   declines.

Consequently, employment level index in the non-manufacturing segment declined   for   the   fifth   consecutive   month   in   June   2016 at 42.5   index points, compared   to   the   44.6   points   recorded   in   May.  Except one, 17 other sub-sectors   recorded   declines   in   employment   level.

The plummeting employment level index in the segment was connected with the gale of mass sack in the banking industry, which banks have been doing secretly, except three lenders that made their own public.