Nigeria stocks, black market naira soar after FX reforms

By Chijioke Ohuocha and Oludare Mayowa LAGOS (Reuters) - The Nigerian naira firmed on the black market on Friday, while stocks posted their biggest weekly rally in 14 months as domestic funds snapped up shares following central bank currency reforms designed to attract foreign investors, traders said. The central bank has said it will let the market set the exchange rate freely as of Monday, abandoning a 16-month policy of pegging the currency at 197 to the dollar, harming investment and causing the economy to contract. [nL8N1973DJ] The naira traded at 355 on the black market on Friday, up 2.8 percent on the day following the central bank's announcement on the currency reforms. A Reuters poll found that analysts expect that when the naira floats freely on Monday it will trade at 275 to 300 per dollar. [nL4N19939J] "The success of the new exchange rate regime will ultimately depend on how effective it is in attracting more foreign investment and getting pockets of dollars hoarded on the domestic front back into the market place," said Cobus de Hart, economist at NKC Economists. In the non-deliverable forward markets, the one-month contract, gained 3.45 percent to equal the record high of 300 naira per dollar hit the previous day. Stock traders said domestic investors were buying shares at cheap valuations, hoping that a more liberal currency market and the recent stock-market rally will draw foreign investors, who have avoided Nigeria due to the risk of a currency devaluation. The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, climbed for the third straight day on Friday, to close 2.66 percent higher at 29,247 points. Stocks rose 7.4 percent this week. But worries over where the naira will start trading on Monday and how an estimated $4 billion backlog of demand in the currency market will be cleared, still persist, analysts say. Bank chiefs and treasurers were meeting central bank officials on Friday to discuss trading on Monday.[nL8N1984QD] The central bank on Friday sold long-dated treasury bills at higher yields than in the secondary market to mop up naira liquidity before the start next week of open market currency trading, to curb speculation.[nL8N19922F] It mopped up 205.9 billion naira ($1.03 billion) worth of one-year bills at a price yielding 15.6 percent, the same level as inflation, which was running above a six-year high as of May. [nL8N19619G] Secondary market bills were trading at 10.81 percent on Friday, traders said. "Foreign investors will need to be convinced that the new FX regime is sustainable in the medium-term and will likely also require higher yields before resuming the purchase of local debt," said Samir Gadio, head of Africa strategy at Standard Chartered Bank. (Additional reporting by Karin Strohecker in London; Writing by Chijioke Ohuocha; Editing by Hugh Lawson)