According to Bloomberg, conversations are ongoing between the FMDQ and the Central Bank OF Nigeria (CBN) about extending the FX futures curve to 10 years, as the country constantly explores means to manage its foreign exchange risk.
In recent times, pressure has been mounting on the country’s reserves as oil prices have been oscillating around the government’s US$60/bbl benchmark, causing an outflow of foreign investment from the capital market. The external reserves peaked at US$45.12 billion in May 2019 but have since declined by c.4.37% to US$43.10 billion as at 6Â September.
The continued decline in the reserves could limit the ability of the Central Bank to keep up with its interventionist policy in the foreign exchange market, underpinning the rationale behind exploring new ways of managing foreign exchange risk.
[READ ALSO: FinTech Wars: Access Bank reveals how much it lends daily as payday loans]
The foreign-currency futures contracts were introduced by the Central Bank in 2017 and were recently extended to a maximum duration of 13 months. The introduction of the futures contracts helped to attract investment to the treasury bills market as investors are able to hedge against fluctuations in the Naira for the duration of their investment.
However, the availability of only short-term contracts limits the inflow of non-resident capital to markets with long-term maturities. This has resulted in a concentration of short-term maturities which the Central Bank is constantly trying to manage, being the main supplier of FX to the foreign exchange market.
In our opinion, longer-tenor futures will help to drive capital into Nigeria’s economy. If the FX curve is extended, bonds with maturities of up to 10 years will become more liquid than they currently are, as they will become more accessible to foreign portfolio investors.
Also, an extension of the FX futures curve could result in an increase in foreign direct investments because investors will take advantage of the futures to guard against exchange rate volatility.
Additionally, an extension of the curve provides opportunities for Nigerians in the diaspora to bring their money home and would also be beneficial to long-term borrowers in foreign currency (corporate and non-corporate) as it reduces the fear of an unexpected erosion in the value of the Naira.
[READ MORE: Domestic Investors Out-perform Foreign Portfolio Investors in May]
