Multiple windows: Investors adopt equity templates for forex rate

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Sopuruchi Onwuka

With inability of businesses to secure adequate foreign exchange at official rates to drive transactions that transcend the country’s borders, business proposals involving international transactions have become source of confusing calculations.

Whereas the official rates for the exchange of the Naira for key currencies that facilitate international trade remain at about N445 per a unit of the benchmark dollar, actual procurement of dollars and other international currencies are subject to the vagaries of the informal market forces.

Government and its agencies readily access foreign exchange from the nation’s depleting reserves, but businesses and private individuals rely on the parallel market for swift access to foreign exchange but at nearly 100 percent hike on the official rate.

CBN Governor, Mr Godwin Emefiele

Acute scarcity of foreign currencies and the rising rate of Naira per dollar lead financial pundits to conclude that Naira is artificially overvalued by government.  The situation, analysts conclude, continues to mount strong pressure on the system for inevitable devaluation of the Naira in 2023 as inflation assumes the notorious Zimbabwean scale.

Analysts used to assess how out of sync Zimbabwean equities were due to rampant inflation by measuring the difference between the London and Harare stock of insurer Old Mutual Limited, Africa’s largest insurer. Old Mutual’s Harare shares were suspended in 2020 after authorities blamed moves in the stock for fueling a collapse in the local currency.

Following the model, analysts at international finance journal, Bloomberg, place the real value of the Naira at par with the parallel market rate than the official one, and in comparison with the stock value of local entities listed in foreign bourses.

Portfolio manager at abrdn in London, Kevin Daly, is quoted as saying that the Naira is presently very “very overvalued,” adding that abrdn sold its Nigeria assets in 2020 because of capital control concerns and will only return after the currency is weakened and bond rates are higher.

Analysts predict that after allowing it to weaken three times since March 2020, the CBN would devalue the Naira in 2023, probably after the incumbent administration of President Muhammadu Buhari has served out its disastrous tenure.

Currently, investors and business operators, especially importers that rely on foreign currencies, have come to face the reality of deceptive and unrealistic foreign exchange rates which is the main component of the monetary policies driven by the Central Bank of Nigeria (CBN).

The Oracle Today confirms several reports noting that the business community may have abandoned government’s value rating for the Nigerian local currency, opting instead to deal with the realistic informal market as the value determiner.

The rate of the Naira at the parallel markets, our findings have confirmed, rules international value for the Naira, controls the prices of imported goods and services and forms the main trigger for inflation in the domestic economy. This leaves the CBN exchange rates as mere mitigating leash on galloping inflation.   

Some foreign news agencies reported weekend that mainly foreign investors with interest in Nigeria now turn to stock value of foreign listed entities as prime indices to determine the actual local value of the Naira.  The investors, according to the reports, relay on the stock value of some blue chip Nigeria companies listed on the main bourses in the United States, Canada and United Kingdom in comparing value for same stock at the Nigerian Stock Exchange (NSE).

Reference stocks include those of international telecommunication and oil companies that hold dual listing in Nigeria and Europe. Leading the trusted references are Airtel Africa Plc and Seplat Energy Plc.

Portfolio manager at Altree Capital Limited is quoted by our sources as pointing at the stock of the two companies as prime indicators of realistic valuation for the potential sale of holdings on the Nigerian Stock Exchange.

 “We mark our portfolio at an implied exchange rate obtained by using the average implied exchange rate from Airtel and Seplat prices in London and on the NSE,” Chamberlain said in an emailed response to press questions.

“This rate trades closer to the black market rate, but I know we can realize this valuation if required.”

Equity investors and businesses pursuing international transactions have found Nigeria an unusual case since the present administration of President Muhammadu Buhari took the reins of government in 2015, leading the country straight into economic recession and plundering inherited foreign exchange stockpiles.

Since then, the CBN has adopted creative instead of data driven measures in determining the nation’s economic health, defying known principles and fixing artificial value for very scarce foreign currencies available in the country.

The arbitrary fixing of the value of the Naira also dents the nation’s official economic data, draining trust from the official figures advanced by government on the state of the nation’s economic health.

Whereas the CBN boasts of Naira’s strength against the dollar, market situations on foreign exchange shock foreign businesses that bank on official figures, with companies like Emirates Airlines suspending operations in Nigeria due to inability to repatriate funds at official rates.

For companies like that which sold its tickets in local currency under the guidance of exchange rates published by the CBN, repatriating same amount under open market rates would translate to huge loss of revenue and non-profitability of its operations in the country.

The International Monetary Fund has estimated that as much as $1.7 billion of investor funds could be trapped in Nigeria’s economy.

Whereas the difference in rates confound cash businesses seeking liquid foreign exchange, traders in stock already know what to expect either in Naira or in any other currency. Portfolio mangers simply shoot a glance at the value tables for dual listed equities emerging from Nigeria, notably Seplat and Airtel.

Airtel closed at 116.2p in London on Wednesday, compared with N1,270 in Lagos — equivalent to £2.41 at the official rate. For Seplat, the levels were 96.2p against N1,089 or £2.07.

Altree, incorporated in Bermuda, utilizes the Seplat-Airtel derived rate “as we believe it is a fair reflection of where we would be able to realize our Nigerian exposure today should we require the liquidity,” Chamberlain said.

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