Published On: Sun, Aug 5th, 2018

Naira remains stable as foreign portfolio investors take lackluster position


Review of Nigeria’s foreign exchange market in the last one month has revealed that the Central Bank of Nigeria (CBN) regular intervention in the market has kept the naira stable as foreign portfolio investors (FPIs) adopt a wait-and-see position in the equities market. 

The local currency has been stable within a band between N360 and N362 against the dollar at the Investors and Exporters (I&E) foreign exchange window in the last seven months of 2018, though the Nigerian equities market plummeted -4.34 per cent year-to-date.

Since April last year, the financial system regulator has continued its intrusion into foreign exchange market, injecting over $1 billion July 2018. This was aided by a major in crude oil price from below $28 per barrel in January 2016 to $73.35 on Friday, August 3, 2018, which propelled Nigeria’s foreign reserves to $47.07 billion, giving the CBN the impetus to continue to defend the naira.

The value of total transactions on the Nigerian Stock Exchange (NSE) plunged -61.1 per cent to N73.04 billion in July compared to N187.78 billion in June as foreign investors continued to express yield curve sentiment towards emerging markets as US treasury yields increased. Foreign transactions on the bourse were down -46.92 per cent to N102.41 billion in June with foreign inflows dipping -22.71 per cent and foreign outflows also dropping by -58.40 per cent in June. Similarly, domestic transactions declined by -31.87 per cent in June 2018. The exchange is yet to release its domestic and foreign portfolio investment report for July 2018.

The impact of the decline in the country’s foreign portfolio investment (FPI) on the forex market has been insignificant, because the CBN has been actively intervening in the market, declared Abayomi Ajayi, investment analyst, EDC Securities. “In July alone, they supplied over $1 billion in the forex market. That was one of the reasons they did not adjust interest rate during the last Monetary Policy Committee (MPC) meeting,” he told Business Hallmark.

He noted that the CBN would continue to defend the naira as it cannot afford to allow the value of the local currency decline as the country moves towards the general elections in 2019. “And we may continue to see FPI outflow since the US Federal Reserve says there would be more rate hike,” explained Ajayi.

The naira lost N0.36 against the dollar to close at $/N362.67 on Friday at the I&E window also known as the Nigerian Autonomous Foreign Exchange (NAFEX) window, but remained stable at $/N360 at the street market. Meanwhile, the equities market dropped -0.52 per cent as the All Share Index berthed at 36,603.44, though the appreciated marginally 0.09 per cent last week.

As the country approaches the 2019 general elections, there are expectations that more pressure on the local currency due to increased political spending, which would push up money supply.

The naira exchange rate would be pressured by flight to safety by foreign and local investors, decline in the country’s external reserves as crude oil price is expected to moderate and production volume drop, posited Johnson Chukwu, Managing Director, Cowry Asset Management Ltd.

He further stated that equity market would remain largely bearishto be waned by flight to safety and dampened corporate performance. Chukwu projected that bond prices would enjoy moderate gains from portfolio switch by local investors away low yield T/Bills and variable income assets.

Meanwhile, the CBN has declared that it is well positioned to deal with any shock that may arise in the foreign exchange market due to political activities. And in a bid to ensure liquidity in the forex market, it recently directed banks to sell Basic Transport Allowance (BTA) and Personal Transport Allowance (PAT) to customers without having to open an account with them.  The apex bank also increased its weekly allocation to bureau de change operators from two to three times to enable customers have more access to forex at the retail end of the market.

Banks also recently reviewed upward customers international spending limited from $1,000 to $3,000 for their international online and Point of Sale (POS) transactions.

And to curtail pressure on the naira, the CBN in April 2018 concluded a $2.5 billion currency swap deal valued at 15 billion Renmibi with People’s Bank of China (PBoC). The deal allows Nigerian to import goods from China using Renmibi and Chinese importers can now get naira invoices. The apex bank commenced bi-weekly Renmibi sales at on July 31, 2018, exchanging N49-51 against the naira. It was, however, sold for N53.35k at the parallel market. China is Nigeria’s largest trade partner.

The CBN has deployed several measures to stabilize the country’s foreign exchange market, including the closure of the Retail Auction Dutch System and the Wholesale Auction Dutch System; labeling of 41 items as not fit for forex at the official windows and the introduction of the I&E forex window in April 2017, which has help tremendously in stabilizing the market.

Meanwhile, the improved dollar liquidity in the economy has not been strong enough to reverse investors’ negative sentiment in the equity market, which plummeted -18.05 per cent in the last six months, after appreciating 42.30 per cent in 2017, making one of the best performed market globally.

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