Total foreign exchange (forex) inflows into the formal trading channel rose by almost a quarter amid optimism that the abolition of multiple forex rates by the Central Bank of Nigeria (CBN) will lead to improved forex liquidity and a stable naira.
Trading data at the Investors and Exporters Window (IEW) showed that total inflows into the IEW, the convergence market for forex trading, increased by 23.8 per cent to $1.41 billion in June 2023 as against $1.14 billion in the previous month.
The sustained increase in inflows, for the second consecutive month, came on the back of the abolition of the multiple forex rates by the apex bank, in line with the policy direction of the new government of President Bola Tinubu.
A breakdown of the data, obtained from the FMDQ, showed increases across segments of the supply side, with foreign inflows recording the highest percentage increase of 44.3 per cent.
A monthly analysis indicated that foreign inflows rose to $298.8 million while domestic inflows improved by 19.3 per cent to $1.11 billion in June, this year. Domestic inflows were driven by increased inflows from non-bank corporates, which rose by 35.7 per cent to $597.10 million in June 2023, and inflows from exporters, which increased slightly by 2.3 per cent to $448 million.
Analysts at Cordros Capital said they expected the ongoing monetary policy reforms to positively impact the forex market over the medium term.
“We expect the lingering reforms in the forex market to translate to improvements in forex liquidity conditions over the medium term as market participants’confidence builds up. However, we think foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its forex backlogs and the direction of short-term interest rates amid high inflation,” Cordros Capital stated.
Managing Director, Financial Derivatives Company (FDC), Mr. Bismarck Rewane, at the weekend said positive policy actions by the government could be reinvigorating, although substantial risks remain on the horizon.
According to him, after an extended period of policy drifting, it was refreshing to hear a flurry of policy announcements from the federal government, including reversals of many policies that had raised concerns, such as imposition of five per cent value added tax (VAT) on data.
“Investors are cautiously impressed with some of the policy changes but want to see some follow-through. In this era of political uncertainty and election petitions, positive economic news is reinvigorating to investors,” Rewane stated.
FDC, however, noted that despite of the policy dynamism, there are still some risks, noting that the naira has been oscillating around N800 per dollar, yet forex supply into the market is still in drips.
“Banks are still trying to game the market but are finally capitulating to market forces. Interest rates in the money markets are artificially depressed and we believe that the next round of adjustment will follow the appointment of a cabinet,” FDC stated.
The FMDQ Securities Exchange had last week announced a revision of the computation methodologies of the NAFEX and IEW spot rates to effect a transition from the current contributions-based model, which involves the use of indicative quotes from market participants, to a transactions-based model, which will apply actual forex market transaction data. The revision took effect on July 5, this year.
Cordros Capital noted that the revision aligned with the global shift in benchmark administration to a transaction-based model and the ongoing reforms in the domestic forex market.
Analysts noted that the changes in computation and the decision of the apex bank to allow international oil companies (IOCs) to sell dollars to banks would have positive impact on the forex market.
“On the one hand, we expect the computation changes to improve transparency in the computation of the spot forex rates and provide a clearer picture of the forex rates reflective of the market realities at different times, albeit with increased intra-day volatility. On the other hand, the IOCs being permitted to sell their dollars to dealing members will likely increase forex liquidity in the IEW over the medium term, supporting the local currency,” Cordros Capital stated.
Latest report on foreign portfolio investments (FPIs) at the stock market had indicated a significant improvement in foreign investors’ participation in the Nigerian investment market. Total FPI transactions rose by 338.72 per cent, driven by significant 649.6 per cent increase in inflows.
The report, for the period ended May 2023, showed that total FPIs increased from a record low of N8.47 billion in April 2023 to N37.16 billion in May 2023, its highest since June 2022. The total FPI in April was the lowest in recent years amidst anxieties over the political transition.
FPI inflows, which represent the buy side of the transactions, jumped from a record low of N3.67 billion in April 2023 to N27.51 billion in May 2023, its highest since November 2021. FPI outflows – the sell side, recorded a slower increase of 101.04 per cent from N4.80 billion to N9.65 billion.
The FPI report, coordinated by the Nigerian Exchange (NGX), included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of FPI trend. The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the equities market and the economy. While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation.
When inflows outweigh outflows, it simply means foreign investors are buying more quoted equities than they are selling and when outflows outpace inflows, it implies that foreign investors are selling more of their investments than buying more investments. Thus the position of FPI surplus or deficit.
The NGX noted that the May 2023 performance was partly driven by the record-breaking bullish rally triggered by the May 29, 2023 inauguration of President Bola Tinubu, widely considered as a pro-market administrator.