Back in January, we asked where the Naira/US dollar rate was headed. We mentioned three outcomes. The NAFEM rate and the parallel rate could converge or diverge; or, more specifically, the authorities could “leave the NAFEM rate to merge with the parallel rate”. This is what has happened, more or less, with the NAFEM rate trading in line with the parallel rate at the end of last week.
Does this mean foreign exchange liberalisation has taken place? Not exactly. The NAFEM rate and the parallel rate have only just merged and 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.
Foreign exchange turnover in the NAFEM market (there is no data for the parallel market) has been rising this year, but not hugely. Turnover data from the NAFEM market is lumpy, but the 30-day moving average has been trending upwards. The problem is that, without some large volumes soon, that moving average is set to move down again. April’s total turnover was US$4.90bn compared with US$6.97bn in March (albeit there were 20 trading days in March and only 18 in April).
Where will these large volumes come from? At the end of February Business Day newspaper reported the CBN stating that foreign portfolio investment (FPI) in 2024 was already US$2.0bn. Given that the 1-year Nigerian Treasury Bill yield is comfortably over 20.0% it would be surprising if foreign investors did not take a look at Nigerian securities again, with a view to creating FPI. The issue, in our view, is that US$2.0bn, while welcome, is not large in the scheme of things, given Nigeria’s track record in attractive FPI over the years. And, assuming this US$2.0bn (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. (Another problem is that FPI, when invested in short-term fixed-income securities, needs to be paid back soon.) There is no published data from the National Bureau of Statistics (NBS) for FPI in Q1 2024 yet; the data release will be examined closely by the FX market.
Other newspapers have reported US$30.0bn in foreign direct investment (FDI) commitments to Nigeria. In the scheme of things, this would be a transformation given that total FDI in 2023 was less than half a billion US dollars. The question is when/how soon of these commitments will materialise.
Our sense, expressed before on these pages, is that the backlog of FX demand from investors and businesses, may still be an issue. Although an audit designated some US$2.4bn 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 stablise considerably later in the year.
Coronation
