FX uncertainty slows investment as market players await CBN’s policy action
Market participants are anxious over the extent of correction that may be needed in the Naira foreign exchange rate, and are reluctant to commit to new investment projects until this correction has been seen, according to Razia Khan, Managing Director, Head – Africa Macro Global Research, Standard Chartered Bank, London .
NGN FX indicator as revealed by Standard Chartered-MNI Business Sentiment Indicator (BSI) falls to a series low in May 2015.
The Standard Chartered MNI Business Sentiment Indicator (BSI) for Nigeria is a diffusion index, summarising in a single number how optimistic businesses feel about current and future economic conditions.
The ‘effect of the NGN exchange rate’ has consistently been one of the weakest sub-indicators since the survey began in March 2014 and very recently, sentiment appears to have weakened further.
Nigerian firms report that the NGN exchange rate is having a significantly negative impact upon their businesses.
The current conditions indicator fell 18.4% to reach a series low of just 16.8. Future expectations, however, rebounded sharply to 56.9, perhaps reflecting respondents’ belief that the Central Bank will have to take some action to improve FX availability over the next three months.
However, The key message from the May BSI is that perceptions of current business conditions are improving but only very gradually. Future expectations are much more robust.
The three-month BSI increased to 61.1 from 60.0 in the three months to April. Only 6 out of the 15 current conditions indicators improved in May, and mostly only by a small amount. In contrast, 5 out of 15 future expectations indicators improved in May (one indicator–new orders–was unchanged), each to a series-high.
The Nigerian economy is currently beset with deep challenges, but businesses appear optimistic that with political transition, these may soon be overcome. At the time of writing, just ahead of the transition, Nigeria’s economy faces much uncertainty.
The country has been hit by increasingly frequent fuel shortages ahead of the political handover. Official grid power generation had reportedly hit a low of about 1300MW.
Nigeria’s interbank FX market has not seen active two-way trading since February, amid reports of an increased queue for FX. Many investors are waiting on the sidelines, for more clarity on how a future FX regime might work, as well as the extent of correction needed in the Nigerian naira (NGN) before recommitting to Nigerian markets.
Public-sector salary arrears still need to be quantified, and Nigerian businesses have long reported difficulty in passing price increases on. Margins have come under sustained pressure.
Nigeria’s incoming administration is likely to find its policy agenda full, Khan said in the report.
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