The shift from a tiered to a managed floating FX regime in Nigeria opens up the US Dollar-based equities investment case again, according to Alan Cameron, Economist at Exotix Partners.

“From a top-down, strategy perspective, we view this change in FX policy as a positive catalyst overall, and while the country investment case remains challenged it is no longer untouchable,” said Cameron.

The Central Bank of Nigeria (CBN) announced on Wednesday, June 15, a flexible foreign exchange regime that would see the country abolishing the dual exchange rate regime. 

All the existing segments of the market will be merged into a single “window”, with market-determined pricing and limited CBN intervention. 

The new policy effectively removes controls on the Nigeria naira (NGN), allowing increased USD supply that would help strengthen the economy.

Cameron estimates NGN fair value in the 280-290 range, but immediately after the move to a managed float the risk of an overshoot is high (the parallel rate is 370 compared to the official 200).

He said that even after the devaluation the macroeconomic path ahead remains very difficult and there are serious downside risks from the oil price, the impact of Delta militancy on oil volumes and the structurally-precarious balance between Northern and Southern interests.

“Critically though, the FX regime is no longer an obstacle to GDP growth. For some US Dollar-based equity investors the new FX regime will enable the exit of previously trapped capital, but at the macro level this should be outweighed by access to fresh capita,” he said.

According to Cameron, investors should be more willing to give credit for Nigeria President Muhammadu Buhari’s reform of governance.

“The lesson we glean from currency crises in emerging markets is that equities can recover USD-based performance after the devaluation only if the broad economic framework is perceived as credible and, in our view, actions on the national oil company, the single Treasury account and the long list of personnel changes, in a Nigerian context, amount to a credible reform programme (hitherto spoilt by intransigence on FX policy),” he explained.

“We now enter a “twilight zone” period during which bottom-up analysts may downgrade their company earnings estimates (to reflect economic stress) and remain cautious, while top-down analysts posit effectively a lower cost of capital,” Cameron said.

He added that the risks of exclusion from the MSCI Frontier index have likely been averted.

“Top-down, under the old FX policy we advocated GTB alone, but this FX policy change is a sufficient pivot in the story, from our top-down perspective, to broaden portfolios to other Banks (Zenith, UBA) and to a lesser degree (given less attractive valuations and greater vulnerability to devaluation), consumers (Nigerian Breweries, UAC), Cement (Dangote) and Materials (CAP),” he said.