Investors move to re-price Nigeria’s risk over Sanusi suspension
Nigeria’s financial markets experienced vibrations in all the segments yesterday, following the suspension of Sanusi Lamido Sanusi, Central Bank Governor, as equities, fixed income and currency were adversely affected.
However, the nature of Sanusi’s exit and its undermining tendency of the independence of the CBN became a major issue of discussion in the financial markets.
“Another factor that will be of concern to investors is the economic and policy orientation of the newly nominated CBN Governor and his pedigree as an independent minded person. Given that Godwin Emefiele was not given to making public comments, it may be difficult for investors to place his personality and economic philosophy.
“These two factors – an affront on CBN autonomy and lack of clarity on Emefiele’s economic policy orientation may be the reasons for financial market instability with possible exit of some foreign portfolio investors, depletion of Nigeria’s foreign reserve, pressure on naira exchange rate and increase in fixed income yield in the next couple of days and weeks,” says Johnson Chukwu, managing director, Cowry Asset Management limited.
On the forex market, the uncertainty of investments in Nigeria was further heightened, which implied that the commitment of the CBN to protect the naira exchange rate may be significantly threatened.
At the equities market, average foreign investor’s sentiment entered flight mode, while at the money and bond market, indications emerged that the FGN bond market was immediately shut down following the announcement to avoid disruptive sell offs in the market.
Investors feared the impact as they emphasised that Sanusi demonstrated patriotism to ensure that Nigerian economy is insulated against external
shocks with the price and exchange rates stability achieved by some of his policies.
At the Stock Exchange, equities market eroded the previous gain of 1.09 percent after closing negative at the end transaction. As sell pressure mounted, the NSE All Share Index (ASI) declined by 1.47 percent, from a high of 39, 397, 09 points to 38,816.19 points while the value of listed equities declined to N12.468 trillion from N12.654trillion, down by N186billion
BusinessDay investigations further revealed that within the hour following the announcement of the Sanusi’s suspension, the naira depreciated sharply to N169/$ at the interbank market from N163.7/$ it closed the previous trading day. The Nigerian interbank foreign exchange market was reported suspended for the day, following the volume of demand that hit the market in the following hours. Significant pressure also mounted up at the Bureau de Change (BDC) end of the market.
Market analysts at Meristem Securities Limited said: “The impact of Sanusi’s suspension was immediately felt as the naira came under immense pressure depreciating to N169 a dollar down from N164 the previous day, thus resulting in a temporary shutdown of the market to douse the pressure.
The fixed income market did not open for trading. The mood in the equities market was bearish, characterised by negative sentiments and selling pressure from investors. We are of the opinion that the recent development is being perceived by foreign investors as a loss of autonomy by the Apex bank thus aggravating the already heighted uncertainty.”
Abiola Rasaq, team leader, research, UBA Capital told BusinessDay that they had expected markets to react negatively to the news, “as it reinforces our conservative view on the naira.” He expressed optimism that equities, fixed income and currency markets should be bearish in the near term; impairing recent stability.
Looking at the impact on the markets, he said: “Naira traded as high as N169/per
dollar on the back of the news and yields rose higher, thus leading to a shutdown of the markets. Whilst this is down to enable investors recover from the shock and reassess the fundamental impact.”
“Notably, this event may usher in a more collaborative policy direction with the fiscal authority. Our expectation of an extra-ordinary general meeting before the scheduled March meeting becomes more reinforcing with likely devaluation of the naira through an increase in the mid-point to N162 per dollar about 5 percent devaluation which should calm recent speculation. More so, it will provide increased Naira revenue to the government; a mild cushion to weakening fiscal dollar inflows from oil,” Rasaq added.
Afrinvest analysts said, “We anticipate a huge capital inflow reversal with monumental impact on the Nigerian Capital Market and the Currency. We also expect the stock market to assume a bearish trend in the near term, especially the banking stocks. The FGN bond yield should also cross the 15.0% mark in the near term as investors re-price Nigeria’s country risk, while the naira is expected to come under intense pressure, hovering above N175 per dollar at the BDC market segment. However, the legitimacy of the president’s suspension of the CBN Governor might be called to question as events unfold.”
Sewa Wusu, market analyst at Sterling Capital said, “My take is that the suspension of the CBN Governor may temporarily hurt the financial system as investors and market players will respond negatively to the news. The suspension may likely create some levels of uncertainty and volatility in the market because the position of CBN governor is very imperative to an economy. I believe the suspension will come as a shock to foreign investors who are seeing the country as investment destination,” Wusu noted.
Accordingly, he added that foreign investors will likely want to evaluate the impact of this news on their existing portfolios, while adopting a wait and see approaches in the near term before making any investment decisions in the country`s investment space.
“This is more so because their investment decisions are influenced largely by regulatory pellucidity and relatively stable macroeconomic environment of which the Nigerian economy has enjoyed over the last couple of months, particularly if you priced in some of the policies adopted by CBN under the leadership of the suspended governor,” Wusu said.
Femi Ademola, head, research and intelligence, BGL plc said, “Since the tenure of Sanusi is almost over, it was expected that he would be allowed to complete it, especially since the rumoured face-off with the President has been resolved.”
“In recent times, the monetary authority has presented itself as the saviour of the economy and the market by its management of exchange rate and interest rate. The attractive yield on Nigeria’s fixed income instruments and the stable exchange rate in the face of risks to fiscal sustainability have been serving as attractions to foreign portfolio and direct investors” Ademola noted.
He said that the immediate impact of the development at CBN on the financial markets is likely to be sharp and severe; adding “There may be a risk of capital flight to the detriment of the exchange market while sell down pressure on equity and fixed income instruments could persist for some time as the markets grapple with uncertainties. However, the quick move to announce an eventual successor to Sanusi Lamido Sanusi may calm the uncertainties,”
“The global foreign exchange market cannot be suspended and the constraining approach to managing the potential hemorrhaging of the Naira could only spell further doom for the currency because as investors find it hard to convert from the currency, they get more panicked and the pressure is sustained longer than necessary. This could eventually result in the forced official depreciation of the exchange rate in the short to medium term to N160/$- N165/$ range. To stem this tide, the interim leadership of the CBN would have to immediately deploy intervention measures into all segments of the market and supply the US dollar in abundance which would come at costs of significant further erosion of the reserves,” Ademola said.
“As investors move into flight mode on the back of the increased uncertainty on the Nigerian economy and the fortune of the Naira exchange rate as highlighted above, the sell offs are inevitable. In this regard, we are likely to see a total upward shift in the Nigerian yield curve- increases in yields across all maturities. It is also not unlikely for the yield curve to develop a hump with yield at the short end of the market rising disproportionately to the longer end of the yield curve.
This trend may however not be sustained for long as higher yield becomes attractive to domestic large portfolio investors especially the pension funds who would find reprieve in the bond market. In this regard, the supply- demand dynamics that this situation may create for the fixed income market may see yields and short term rates rise to between 14%-16% on the average in the short term,” the BGL analysts added.
With 51.8 percent foreign transaction content in the Nigerian stock market, Sanusi’s suspension could be damaging for the equities market.
Ademola noted that as a leading indicator of economic sentiments, the uncertainty that this development implies is likely to support the bearish trend in the short term as portfolio investors rush to exit; adding “The market which has sustained significant bearish performance since the beginning of the year turned round this week from a two week long downward spiral that was signaled by the monetary policy action of increased cash reserve ratio of public sector deposits in banks, at a time the US tapering of quantitative easing was already impacting the market,”
JOHN OMACHONU, IHEANYI NWACHUKWU & ONYINYE NWACHUKWU