Sonnie Ayere Highlight Hedging Opportunities in Nigeria’s FX Futures Market

Goodwill Message for the Inauguration of the FX Futures Market in Nigeria Delivered By Sonnie Ayere, Chairman/CEO – Dunn Loren Merrifield Group.

First of all, let me say good morning to everyone as I stand on existing protocols.

As we march towards a serious market driven economy for the first time in our history, let me first start by congratulating all those who had sleepless nights, long meetings, accepted constructive criticisms, tore off their shirts (it’s possible), sacrificed precious time away from their families, incurred massive migraines and much more…all in the pursuit of assisting the CBN create this new Forex and futures market; and in doing so, achieving a more realistic, stable and beneficial exchange rate mechanism for Nigeria as a country. I also thank the governorship of the CBN for listening and accepting to implement and of course our presidency. I believe a big round of applause is in order…Thank you very much.

The Financial markets bring together the workings of all securities markets, including but not limited to the equity markets, bond markets, currency markets, commodity markets and with the money markets as the lifeblood. I say the money markets is the life blood because without access to a liquid and functioning money market, all the markets I mentioned above will and cannot thrive….neither can the participants or players. Today, only banks have access to this money market – so no wonder the drought in performance that we continue to witness across all the other parts of the financial markets.

I hope that the lessons of today and experience we all gather from it, as this new market begins to season – starts to pilot our monetary authorities to foster the creation of more open markets (with strict regulations of-course), that will begin to allow our money markets take its very important role of funding all sectors of the financial markets as should be the case.

On Monday the 20th of June, 2016 the CBN officially floated the Naira exchange rate against the US$. Today, the 27th of June – just one week later, we begin our journey into the Naira/US dollar futures exchange rate market.

What therefore is the futures market?

It is simply a transferable contract that specifies the price at which a currency, (in our case, either Naira or the US$) can be bought or sold at a date in the future for example… 1, 3, 6 , 9 , 12 months or a customised contract between a buyer and a seller.

Why is this important to Nigerians like you and me?

Firstly, we love to hoard! “Iya Juwon – Won ni dollar ma lo so ke o! – Ha! Let us start buying” Let me buy as much as I can today – hoarding;   or speculators always hoping the Naira will continue to fall will buy US$ as if the Naira is going out of fashion. This, amongst other practices that have never been beneficial to our currency….our hope is that the introduction of a futures market will begin to quell these practices.

For example, imagine you are a trader who needs to order in a container of goods needed for the manufacture of goods here in Nigeria and the container is due to be paid for in US$ by December, 2016. You know the exchange rate today but, you do not know what it will be in December 2016. Ordinarily, the trader would leave their fate in the hands of GOD–typical of traders in this “clime” and accept whatever the rate will be in December when he needs to make the payment.

The trader can however now take action against this and mitigate the risk by hedging through this new futures market as follows:

So, if the Naira today is N280 to $1 and you are not sure whether it will be N285 to $1 or N275 to $1 in December but the December futures is today @ N283 to $1, to avoid putting it in GOD’s hands or tying up your hard earned Naira by hoarding by buying US$ today, you now have the option to buy US$ Dollars at the December futures price today which is @ N283. You will be guaranteed that price when you need to pay for your container. You can now focus on making sure you have N28.3m for every $100,000 instead of calling your Aboki dealer every day for exchange rate and having the unnecessary uncertainty!

The N3 extra on today’s rate is therefore the price you pay for locking in that exchange rate required for your future US$ transaction.

Nevertheless, nobody can see the future so, for instance if in December, the US$ happens to fall to N250 to US$1 then you will still pay N283 to US$1. However, if it rises to N375 – GOD bless you, you have saved yourself a lot of money.

The futures market will help importers, exporters, manufacturers, and even the man on the street to begin to optimally manage and plan their foreign exchange requirements and transactions much more easily. The idea of companies stocking high inventories due to currency uncertainty which unnecessarily puts pressure on the Naira can now begin to dissipate.

A man expecting to travel with his family in June next year can lock in a price for the US$ today and therefore know how much Naira his family will need to have, come next year to enjoy that special holiday. The woman paying her children’s school fees abroad can now know her actual cost and fix the price today. These are just some of the numerous examples of that famous word “Hedging opportunities” that will begin to emerge for Nigerians post the take-off of this market.

Another area that this will touch is also job creation – to say the least in the financial sector. Am sure many of you here are now seeking well qualified foreign exchange traders / dealers; so I see this initiative supporting the training, employment and development of currency futures traders across banks, merchant banks and securities dealing houses. Again FMDQ, the market cannot thank you enough for these opportunities.

This therefore is a major shift in policy, one that most observers never expected but all accept is the right thing to have done by the CBN.

So, as we begin to experience a stable forex market going forward, the hope is that the next major thrust for our monetary authorities to take a stab at is to sustainably deflate our economy, in other words reduce the rate & growth of inflation in Nigeria. I say this because of the link between a country’s currency and its level of interest rates.

I first heard of Naira floatation during my IFC days and in discussions with the then CBN governor Prof. Charles Soludo. Since then, 2005 to be precise, it’s taken approximately 11 years for us to get here. I seriously believe we did not have to wait this long. For instance, the use of interest rates to manage the currency which took our MPR from 6% to 12%, I still strongly believe was not necessary and cost the country’s growth prospects dearly. I have always maintained that we let the Naira find its FAIR VALUE amongst other currencies so that monetary policy can concentrate on fixing other critical parts of the system.

Our inflation is NOT demand driven, I repeat NOT demand driven. Many economies that have been able to achieve large availability of credit to their economies through loans, credit cards, etc (especially retail) can somewhat shock inflation into a standstill and begin to reverse it with major increases in interest rates to curb spending / buying power. BUT, that is not what we have here.

It’s clear to some of us on ground that the cause of our inflation is the opposite as in, cost-push driven, this means the cost of the factors of production here are high and easily affected by price increases. This is mainly due to the poor infrastructure we have harboured for decades, lack of investment, lack of savings, etc. We therefore hope that a major shift in monetary policy towards a sustained lower interest rate regime and then developing and making it a policy of maintaining a positive yield curve within that regime is adopted by the CBN. We believe that this will in-time begin to direct lending / investments away from government securities and into the real sector, factories, roads, power thereby allowing for increased and sustainable job creation and economic growth and from a financial market perspective, financial market product creation for investors like the pension funds. Lower interest rates will also make capital expenditure borrowing for companies much more affordable, therefore supporting economic growth, reducing the sizes of bank NPLs from quarter to quarter as the borrower’s ability and therefore willingness to pay his/her debt increases to a more sustainable repayment and credit culture.

Before I leave, I will go back to the beginning;

The Financial markets bring together the workings of all securities markets. I go back to this again because it’s important to realise that as we celebrate this innovation in the currency markets today, we must remember that it’s just one part of our entire financial markets. We cannot however ignore the complete and optimal operations and liquidity of our equity markets, bond markets, etc. The foreign portfolio investor or speculator view our markets as one (i.e. they look at our currency markets before investing in our bonds or stocks) as these markets are all inter-linked and do not exist in silos.

Therefore, to strengthen and provide the right platform for stabilising our markets within a market driven economy under a floating exchange rate regime; it is imperative that the CBN begins to look at ways in which our entire financial markets can begin to work as one. This has mostly been achieved in other markets by developing and supporting dealers/brokers that can operate across the entire financial market spectrum. Malaysia for one, through Bank Negara (their central bank) achieved this during their market evolution by developing, licencing and supporting what they called a Universal Broker licence.

I would hence use this medium to advice the CBN that this is the time to strengthen the domestic financial markets by empowering its participants.  In other words, it’s time to take a critical look at developing a similar licence to help strengthen Nigeria’s domestic market operators and by so doing, its domestic markets, which will go a long way in helping to improve and foster financial stability.

I personally feel that FMDQ as an institution and platform is the beginning of all things wise and to come in the development of Nigeria’s financial markets going forward and we all hope and pray that the board, leadership and management team continue to grow from strength to strength in their quest to provide the right platform for a sustainable financial markets to support the growth of the Nigerian economy.

Finally, I must say a big thank you and congratulations on a job well done to:-

  1. The Governor of the Central Bank of Nigeria – Mr Godwin Emefiele (CON) and the entire management of the CBN
  2. The Chairman of FMDQ – Mrs Sarah Alade (OON),
  3. Mr Emmanuel Ukeje – Director, Financial Markets CBN for their dedication to the continued development of our financial markets.
  4. The Managing Director of FMDQ – Mr Bola Onodele (koko) and his erstwhile team.
  5. And all those who participated in making this market come true.

Thank you all for being here and a part of this inauguration. Thank you very much and GOD bless the Federal Republic of Nigeria.

Signed: Sonnie Ayere

 

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