FX Liquidity Conditions To Remain Tight Amid $33bn Reserve Level
Despite Nigeria’s FX reserves starting the year on a positive note, economic analysts have said they expect FX liquidity conditions to remain tight pending receipt of expected FX inflows.
According to data obtained from the Central Bank of Nigeria (CBN)’s website, the country’s gross level increased by $129.82 million week-on-week (w/w) to $33.04 billion. Similarly, the Naira appreciated by 3 per cent to N869.39/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover in the market declining by 56 per cent week-to-date (WTD) to $169.64 million, with trades consummated within the N700-N1,268/$ band.
However, the naira at the parallel forex market where forex is sold un-officially, declined by 1.99 per cent to close at N1,255/$1.
In the Forwards market, the naira appreciated across the 1-month (+7.5 per cent to N907.02/$1), 3-month (+7.0 per cent to N929.47/$1), 6-month (+6.1 per cent to N964.05/$1) and 1-year (+4.7 per cent to N1,038.50/$1) contracts.
Reacting to the performance of the market last week, analysts at Cordros Securities noted that despite Naira appreciation as well as the nation’s current reserve level, they expect FX liquidity conditions to remain tight, pending receipt of expected FX inflows.
Although there is a lot of optimism that FX transactions will improve, domestic transactions have been mainly driving the market. According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse rose to a 4-month high, after increasing by 34.1 per cent m/m to N300.67 billion in November (October: N220.94 billion).
The breakdown shows that the domestic investors were the primary drivers of the increase, as domestic transactions (76.3 per cent of total transactions) increased by 22.2 per cent month-on-month (m/m) to N229.30 billion (October: N187.58 billion). On the other hand, foreign transactions (23.7 per cent of gross transactions) increased by 113.9 per cent m/m to N71.37 billion (October: N33.36 billion) – its highest level since March 2020 (N110.22 billion), likely due to investors’ optimism about reforms from the government.
“Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards 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.
