By Chinwendu Obienyi
Despite a drop in total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM), data obtained from FMDQ’s website at the weekend, revealed that inflows from foreign sources soared by 182.9 per cent month-on-month (m/m) to $158.70 million at the end of October.
The figure recorded is against $44.60 million recorded in the previous month (September), although still significantly below the pre-pandemic level (Q1 2020 average: $1.28 billion). According to FMDQ, total inflows into NAFEM declined by 6.2 per cent m/m to $1.23 billion in October after hitting a 3-month high in September ($1.31 billion).
The decline was due to lower inflows from local sources which constituted 87.1 per cent of the total inflows. The report revealed that inflows from local investors decreased by 14.6 per cent m/m to $1.07 billion in October, with significant declines in inflows from the Central Bank of Nigeria (CBN) and individuals.
The decrease in total inflows was offset by the higher inflows from foreign investors, which contributed 12.9 per cent of the aggregate inflows.
Meanwhile, the nation’s FX reserve aincreased for the fourth consecutive week as the gross reserve level advanced by $60.15 million week-on-week (w/w) to close at $33.40 billion (31 October 2023). The naira on its part, appreciated by 1.8 per cent to N776.14/$1 at NAFEM, with total turnover at the market (as of 02 November 2023) decreasing by 28.6 per cent week-to-date (WTD) to $443.09 million, as trades were consummated within the N475.00 – N1101.00/$ band.
In the Forwards market, the naira rates recorded appreciation across the 1-month (+6.0 per cent to N787.21/$1), 3-month (+6.2 per cent to N801.43/$1), 6-month (+6.5 per cent to N823.49/$1), and 1-year (+6.4 per cent to N877.59/$1) contracts.
Reacting to the development, analysts at Cordros Capital predicted that FX liquidity conditions is likely to improve slightly, albeit still frail relative to historical standards, as it appears the CBN has regained its momentum regarding FX reforms.
This is coming after the apex bank disclosed that it has started clearing parts of its outstanding FX backlogs, beginning with the banks that make up a smaller portion of the total outstanding FX forwards.
Simultaneously, the CBN conducted another OMO auction on 30 October, selling N400.00 billion across three tenors, with the 365-day bill closing at 17.50 per cent (annualised: 21.20 per cent). The CBN auctioned another OMO bill two days later, selling instruments worth N77.20 billion. The stop rate averaged 15.36 per cent across the three tenors, with the 365-day bill closing at 17.98 per cent (effective yield: 21.91 per cent).
According to the analysts, irrespective of how frequent the OMO auctions become going forward, the aim is to serve dual functions of mopping up system liquidity and attracting FPIs. They noted that as system liquidity dries up because of the frequent OMO auctions, local yields will increase, making Naira assets more attractive.
“At the same time, it is essential to note that the CBN’s settlement of outstanding matured FX forwards does not indicate FX intervention, but the apex bank just honouring its past FX obligations. Overall, these two actions by the apex bank show its renewed determination to solve the challenges stoking the existing FX liquidity constraints.
Nonetheless, we expect foreign investors to be keenly watching the development in the FX space with regard to the expected FX inflows as guided by the authorities, CBN’s recent actions in clearing its FX backlogs, and firm direction of short-term interest rates”, they said.