The suspension of Sanusi Lamido Sanusi from office as Governor of Central Bank of Nigeria (CBN) sent shock waves into the financial market but did not damage the market as previously feared. The shock was short lived as the Federal Government quickly named his successor. The CBN Governor-nominee, Godwin Emefiele, is seen by local and international investors as a steady hand who will maintain tight monetary policy in the face of currency weakness and avoid his predecessor’s controversial foray into politics.
President Goodluck Jonathan swiftly nominated Emefiele as governor-disignate after suspending Sanusi, who had become an increasingly vocal critic of the government’s record on corruption. His early departure caused a panic sell off in financial markets, although currency and stocks have now stabilised.
Emefiele, who, at 52, is the same age as Sanusi, boasts of more than 20 years experience in the banking sector. He is the Managing Director of Zenith Bank, Nigeria’s fastest growing new generation bank, where he has built a well-capitalised and stable institution, banking sources say.
“He’s done a solid job at Zenith and is likely to be a steady hand who will be calm, but markets are jittery right now. The Nigerian Stock Market had a reversed fortune on the back of the CBN Governor’s suspension as the Nigerian Stock Exchange NSE; All Share Index lost 147 basis points to close at 38,816.19. In the same vein, the market capitalisation shrank by N186.6billion to close at N12.4trillion. However, despite the shock, activity level, as measured by volume and value, surprisingly advanced 59.4 per cent and 27.7 per cent to close at 484million units and N4.9trillion respectively.
As expected, all sector indices declined with the exception of the NSE Industrial Index which advanced slightly by 0.2 per cent on account of gains in Dangote Cement 1.9 per cent. “The NSE Banking Index lost a whopping 4.5 per cent as all banks closed in the red. This loss can be primarily attributed to losses in UBA 7.5 per cent, FCMB 7.1 per cent and ETI 6.2 per cent.
The oil and gas sector followed suit with a 2.7 per cent loss on the day of the suspension mainly attributable to Oando 6.4 per cent and Eterna Oil 4.9 per cent. Lastly, the Consumer Goods and Insurance Index lost 1.8 per cent and 1.2 per cent a piece. These losses were driven by capital reversals on the back of the CBN Governor’s suspension. The market breadth of 0.19x buttresses the negative market sentiments with only nine stocks advancing as against 46 decliners. Top gainers for the day were Oasis Insurance 8.6 per cent, Neimeth 5.8 per cent and PZ 5.0 per cent while top losers were UBA 7.5 per cent, Vitafoam 7.4 per cent and FCMB 7.1 per cent.
By Monday, however, the capital market had absorbed the shock as the NSE All Share Index started the week on a positive note with a 108basis points appreciation, to close at 38,707.14. This gain was attributed to Dangote Cement 1.0 per cent, Zenith Bank 3.3 per cent and First Bank 4.9 per cent. Similarly, market capitalization gained N132.0bn to close at N12.4tn.
But activity level, measured by volume and value, declined 34.9 per cent and 11.1 per cent to N337.0million and N3.1billion respectively. The Banking sector reversed its losing streak, rebounding 2.6 per cent driven by UBA 8.7 per cent, FBN 4.9 per cent and Diamond Bank 4.9 per cent. The oil & gas index followed suit losing 1.1% on the back of the gains in Oando 2.7 per cent; while the industrial index 0.6 per cent was driven by price appreciation in CCNN 3.1 per cent and Dangote Cement 1.0 per cent. The insurance index lost 1.4 per cent on the back of Wapic Insurance 5.6 per cent, AIICO Insurance 5.0 per cent and Continental Reinsurance 4.6 per cent
28 stocks advanced against 18 declined stocks tilting the market breadth to1.6x. Top gainers for that Monday were UBA 8.7 per cent, Dangote Sugar 7.9 per cent and FBN Holdings 4.9 per cent while top losers were WAPIC 5.6 per cent, AIICO Insurace 5.0 per cent and Cadbury 5.0 per cent.
On Tuesday, the NSE All Share Index sustained its gains with 117 basis points appreciation to close at 39,160.10. The Tuesday’s gains were driven mostly by tier one banks such as FBN Holdings 9.7 per cent, GTB 3.7 per cent and Zenith Bank 3.4 per cent. Similarly, the market capitalization added N146.0bn to close at N12.6trn and activity level, measured by volume and value, appreciated 21.4% and 42.0% to close at N409.5m and N4.4bn respectively.
The consumer goods sector index was the lone sector decliner 0.3 per cent driven by selling pressures in Unilever 5.0 per cent and PZ Cussons 2.9 per cent. The NSE banking index topped the sector 4.1 per cent, spurred by gains in Skye Bank 10.1 per cent, FBN Holdings 9.7 per cent and UBA 6.5 per cent. Similarly, NSE insurance index advanced 1.8 per cent supported by gains in International Energy 5.0 per cent, Continental Reinsurance 4.8 per cent and NEM Insurance 4.0 per cent. The NSE industrial index and the oil & gas index also both gained 0.3 per cent and 0.2 per cent apiece. Market breadth sustained its positive trend at 0.43x as 42 stocks advanced against 18 decliners. Top gainers at the end of the Tuesday session were Skye Bank 10.1 per cent, FBNH 9.7 per cent and UBA 6.5 per cent; whilst Unilever 5.0 per cent, Betaglass 5.1 per cent and Evans Medical 4.9 per cent led the losers table. We expect a moderate increase in participation as investors weigh the potential to sustain this upside.
The incoming Governor and the Naira
The biggest challenge for the incoming CBN Governor is protecting the Naira, which has come under pressure over the past year on concerns that reduced U.S. monetary stimulus fund inflows to emerging markets. The Naira slumped to a record low of N169.25 to the dollar in the wake of Sanusi’s suspension and was trading at around N163.5 to the dollar on Tuesday, outside the bank’s preferred N150-160/$ range.
Repeated intervention by the CBN to keep the Naira within the band has run down foreign exchange reserves, and liquid reserves have declined by about $2.2 billion or 5.2 percent from $42.46 billion at the start of 2014. That is about $45 million a day and raises the prospect that interest rates, which have been on hold at 12 percent since October 2011, may have to rise at some point this year to protect the currency.
“We expect he will maintain the current monetary policy tightening stance,” Vetiva Capital said in a research note. In the short term, we believe the currency will remain under pressure which would require continuous monetary tightening – restraining loan growth within a high interest rate environment,” it added.
Investors and analysts expect the new Governor to be more discreet than Sanusi, who was often criticised by government officials for going far beyond his remit, happy to talk openly about anything from bloated government spending to the social problems which are feeding a bloody Islamist insurgency in north-east Nigeria.
Emefiele won’t dip into politics, given the manner of Sanusi’s exit, analysts say, and was described by several banking sources as a conservative figure who appears confident in public but gives little away.
Foreign investors hold around $7 billion in Nigerian fixed income assets, down from $9 billion in November, banking sources say. This is likely to dwindle further in the coming months, heaping pressure on the naira. Bank of America Merrill Lynch downgraded its rating on Nigeria’s external debt to underweight from market weight on Tuesday, adding that it expects the naira to weaken to N170 against the dollar this year, despite tight monetary policy. Yvonne Mhango, an economist at Renaissance Capital, expects forex reserves to fall to $35 billion by the end of this year and thinks Emefiele will be forced to devalue the midpoint in the Naira exchange band to 170/$ in July.
But the CBN, on Wednesday, conducted special foreign exchange sales, which halted the depreciation of the Naira in the inter-bank market. The intervention arrested the inter-bank exchange rate which had risen to N167 per dollar by 1.30pm and forced it to decline to N163 per dollar. The Acting Governor of the CBN, Dr (Mrs) Sarah Alade, in a telephone conference with foreign investors and foreign exchange dealers reiterated the commitment of the apex bank to defending the Naira.
A senior foreign exchange analyst who participated in the conference said Alade told participants, which included global financial firms like J.P Morgan, that the CBN will defend the Naira with the external reserves. She said that the apex bank does not plan or intend to devalue the Naira. It was gathered that most the participants expressed apprehension that the CBN might eventually devalue the Naira, given the continued decline in the nation’s external reserves.
Drop in reserves
Last week Nigeria’s external reserves dropped by $740 million to $41.17 from $41.91 the previous week. Cumulatively the external reserves have declined by $2.44 billion from $43.61 billion at the beginning of last year. The Acting Governor, however, dismissed the concerns, saying devaluation is not on the table and will not be on the table of the apex bank. She said that decision on the CRR and monetary tightening will be based on the outcome of the review of economic development at the next Monetary Policy Committee meeting. The conference call was aimed at assuring foreign and local investors of the stability in Nigeria’s monetary policy as a result of the rising demand for foreign exchange, which is believed to be driven by speculations that apex bank might abandon its policy to defend the Naira.
While the official exchange rate was stable at N155.75, the inter-bank market rose sharply in the morning to reach N167 per dollar by 1.30 pm. Realising that the inter-bank rate might cross N170 per dollar before the end of the day, the apex bank intervened with special foreign exchange sale, which ranged from $1 million to $5 million per bank.
But the Naira depreciated further at the parallel market due to the scarcity of foreign exchange. From N170 per dollar, the parallel market exchange rate rose to N172 per dollar, indicating 200 kobo depreciation for the Naira. According to BDC operators, there is scarcity of dollars because the banks are not selling.
From all indication, calm has returned to the financial market as local and foreign investors are convinced that the CBN Governor-nominee will maintain policy posture that will advance the cause of both markets and the economy. It is now left for the Senate to confirm the governor nominee to give complete assurance to both the local and foreign financial markets.