PHILLIP ISAKPA IN LONDON, UK
Nigeria’s foreign exchange market will remain unsettled for a few more months and any expectation of stability should be much later in the year, say analysts at Coronation Asset Management.
In a market analysis note seen by Business a.m., the analysts said five months into the year 2024, the Nigerian foreign exchange market remains unsettled, noting that it raises the big question about “where the next large purchase of Naira, by either foreign portfolio investors or foreign direct investors, will come from.”
According to them, while reports had offered some ray of optimism, turnover data from the FMDQ Exchange, the fixed income, currencies and derivatives markets, has appeared to be ambivalent.
“Our analysis suggests that progress is being made but that it will take a few more months for things to settle down,” they maintained.
The Coronation analysts also said that of three scenarios they had projected for rates in the FX markets, one of them had been right with the authorities appearing to leave the Nigerian Autonomous Foreign Exchange Market (NAFEM) rate to merge with the parallel rate, “with the NAFEM rate trading in line with the parallel rate at the end of [penultimate] week.”
But this merger should not suggest that foreign exchange liberalisation has taken place, they said, noting that the NAFEM rate and the parallel rate only just merged, and that it is not certain they will remain together.
“There remain various other official rates. All the same, there has been a degree of simplification of the picture, which is progress,” they stated.
According to the Coronation analysts’ note, while foreign exchange turnover in the NAFEM market has been rising this year, it has not been really huge, amid the lack of data for the parallel market. “Turnover data from the NAFEM market is lumpy, but the 30-day moving average has been trending upwards,” they stated.
They also observed that without some large volumes in the market soon, the moving average, which has trended upwards in recent times, is set to move down again. Data shows that April’s total turnover was $4.90 billion compared with $6.97 billion in March, although it can be recalled that there were 20 trading days in March and only 18 in April.
The analysts say the market needs volumes and wondered where these volumes would come from. But while acknowledging the central bank saying that foreign portfolio investment in 2024 had reached at least $2 billion, the analysts noted that given that the 1-year Nigerian Treasury Bill yield is comfortably over 20.0 percent, it would be surprising if foreign investors did not take a look at Nigerian securities again, with a view to creating FPI.
However, they maintained that “The issue, in our view, is that $2.0 billion, while welcome, is not large in the scheme of things, given Nigeria’s track record in attracting FPI over the years. And, assuming this $2.0 billion (or more, because we are not counting possible additions in March and April) is already booked, then more FPI may be needed in Q2 2024 to support FX turnover,” they further stated.
The analysts drew attention to another challenge with FPI, noting that “FPI, when invested in short-term fixed-income securities, needs to be paid back soon.”
They observed that there had been other reports suggesting $30 billion in foreign direct investment (FDI) commitments to Nigeria, adding that “in the scheme of things, this would be a transformation given that total FDI in 2023 was less than half a billion US dollars.”
However, they said it still leaves the question of “when [and] how soon these commitments will materialise.
They said in their view, the backlog of FX demand from investors and businesses may still be an issue, adding that while an audit designated some $2.4 billion of these demands as not legitimate, that does not remove the demand itself.
“As we have opined consistently this year, it will likely take months to clear all the various backlogs. So, we expect the FX market to be unsettled for a while yet, but with potential to stabilise considerably later in the year,” the Coronation analysts concluded.
