CBN introduces 5-year naira-futures’ contracts to lure investors

The Central Bank of Nigeria (CBN) and FMDQ OTC Securities Exchange, a platform that oversees naira transactions, have introduced new naira futures contracts of up to five years, in a move to attract more foreign inflows, shore up its dwindling dollar reserves and avert a likely weakening of the naira, traders said yesterday.

Traders told New Telegraph that the CBN offered naira-futures contracts for five-year settlement for the first time, priced at N379.81 to the dollar.Prior to this move, the longest tenor was a 13-month contract, which the apex bank has offered for more than a year.

Specifically, in a note to clients, the local unit of Citibank said the new forex product is a long-term monthly naira-settled OTC FX Futures contracts i.e. monthly contracts from 14 months up to five years.

The lender said this means that 47 new monthly OTC FX Futures contracts will be issued, bringing the total number of open OTC FX Futures contracts at any point to 60.

“The new contracts will only apply to foreign portfolio investments (“FPI”), foreign direct investments (“FDI”) and foreign currency (“FCY”) loans executed after Wednesday, February 12, 2020.

“Purchase of long-term OTC FX Futures contracts for FPI, FDI and FCY loan transactions executed prior to February 12, 2020, shall be permitted strictly on a case-by-case basis following the express approval of the CBN,” the bank wrote in the note.

New Telegraph learnt that the move was the CBN’s strategy to give itself more time on the settlement of matured contracts and ensure that investors extend their investment for a longer period.

According to a source, “This is one of the efforts adopted to curb the decline in the country’s foreign reserve and ensure that there is availability of forex for those who need it for urgent raw materials and plants.”

The naira has come under pressure this year as demand for dollars continues to be high and as market sentiment, worsen by fears that the coronavirus outbreak would hit Chinese demand, one of Nigeria’s major trading partners and dampen growth.

CBN Governor, Mr. Godwin Emefiele, last month, said that no adjustment of the naira was planned and that the regulator would continue to sustain the value of the naira, even though its dollar reserve was shrinking.

The nation’s forex reserves declined to $36.68 billion as of February 10, down 12.4 per cent from a year earlier, CBN data showed yesterday, as the bank burns through its dollar savings to support the naira.

The CBN now has 60 contracts outstanding from 13 earlier, traders said, underscoring the pressure to attract inflows and to boost reserves.

Nigeria has also floated the idea of tapping the Eurobond market this year to raise it up to $3.3 billion.

On the forwards market, the naira for one-year delivery was quoted at N399.73 against the dollar.

Meanwhile, investors and analysts polled by Bloomberg have predicted that the CBN may likely be forced by the prevailing environment to devalue the local currency in 2021 due to falling oil prices and steady decline in the country’s external reserves.

According to the news agency, 10 out of 19 respondents expect the naira to be weakened in 2021, while five predict a mark-down as early as the second half of this year. The remainder believe the Central Bank will keep a firm grip on the currency until 2022 or 2023.

All but four of the survey participants said the naira is more than 10 per cent overvalued against the dollar. Two respondents said it was at least 20 per cent too strong.

The survey also showed that the respondents were evenly split on the size of the devaluation, with nine predicting the naira will drop 10 per cent or less and the same number, saying it would be marked down by10 per cent to 20 per cent. Only one forecast a fall of more than 20 per cent.

In addition, all but three of the respondents said reserves would have to hit $30 billion before the CBN considers letting the currency fall, which is in line with what Emefiele told investors last year.

However, Bloomberg quoted Director, Corporate Communications Department at the CBN, Isaac Okorafor, as saying after the release of the survey that: “In 2016 we had reserves as low as $23 billion and we survived. We have proved them wrong before and we will do it again.”

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