CBN and the Naira: Another shot at FX stability?

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On the 12th of Feb-2020, the Central Bank of Nigeria (CBN), in collaboration with FMDQ Securities Exchange Limited (FMDQ) notified dealing members of the introduction of long-term monthly Naira-settled OTC FX Futures, elongating the contract tenor from the previous maximum of 13-months to 60-months (5-years). Accordingly, forty-seven (47) new contracts were introduced on Feb 13th, accessible by foreign investors (portfolio or direct) as well as local corporates with foreign currency loans.

The longest dated contract maturing in Jan-2025 was priced at N379.81/$, implying a discount of 4.0% to the I&E window’s spot rate. Thus, indicating the CBN is expecting/betting that the naira will not depreciate by more than 4.0%, over the next 5-years. Notably, no recent liquidation has occurred at the futures market, thanks to the CBN’s consistent intervention in the spot market which had kept the naira stable and the currency market liquid.

In our view, while we understand the CBN’s position on elongating the futures contract tenor to encourage more patient capital into the country and help local corporates hedge FX risks, we highlight that this exposes the bank to large losses in the case of a currency devaluation, which could erode its capital. Thus, the CBN must prudently monitor its long exposure to the naira, but more importantly, continue to push for the expansion of the production and export capacity of the Nigerian economy. In all, the elongation of the contracts to 5-years at an attractive rate of N379.81/$ may now have lessened the possibility of a devaluation, at least in the near to medium term.

United Capital Research