As FX Market Witnesses Increased Inflow…


The fruits of economic recovery initiatives of the federal government appears to be in sight as local and foreign investors may have started returning to the economy, writes Kunle Aderinokun and Olaseni Durojaiye

Measured excitement may have begun to seep into the nation’s economy with the news of an increase in foreign reserves to $595 million, an indication that foreign investors may have started renewing interest in the economy. The excitement is founded largely on the $327 million stake in the federal government bonds.

The resurgence was coming on the heels of stock being re-priced and as the naira continues to lose grounds against the United States dollars leading some financial analysts to predict that the current situation offers attractive valuations for foreign investors. Foreign investors had until recently remained indifferent to investing in the economy as they cited uncertainties surrounding Nigeria’s foreign exchange regime and the Central Bank of Nigeria’s continued intervention in the foreign exchange official market as reasons for reluctance.

An economist and Chief Executive Officer of Financial Derivatives Company, Bismark Rewane, had predicted that the stock market might witness an uptick in foreign portfolio inflow, which could offer much needed boost for the Nigerian Stock Exchange (NSE) in the weeks ahead.

Rewane noted in a FDC’s Bi-monthly Economic & Business Update that, “As equity risk premium rises and dividend yield falls, we expect investors to move to safer assets classes with guaranteed returns”.

Nigeria’s foreign reserves, which had plummeted for about two months, recovered some of the losses when it rose by $595 million in five days to $26.196 billion last Monday. The marginal accretion represented an increase of 2.26 per cent, over the $25.601 billion the reserves stood on August 24. The development was attributed to the inflow of funds into the country’s fixed income market following renewed interest by both foreign and local investors in the market given the attractive yields earlier predicted by analysts.

The inflow was largely buoyed by a single transaction of $270 million at N345 per USD by Citibank Nigeria which bought 11-months treasury bills on behalf of offshore investors. Other transactions were at between N314.50 and N317.34 to the USD.

According to the Managing Director of the FMDQ OTC Securities Exchange, Bola Onadele, the FX market recorded $327 million worth of trades on Monday, which was about six times more than its usual volume.

Average trading at the FX market had been around $50 million on a normal trading day and climb to about $100 million on days when the CBN intervenes in the market. This is as traders told Reuters that the CBN sold an undisclosed amount of USD close to the end of session on Monday, to help prop up the value of the Naira which dipped to between N418 to a USD in the parallel market.

The increase in the country’s reserves and the renewed interest by foreign investors may not be unconnected to the deregulation of the country’s FX regime. The CBN had adopted a market-driven flexible exchange rate in June at the height of FX challenge and increasing foreign portfolio flight from the country.

Despite the policy shift which was hailed by a cross section of the economy, forex liquidity remained a concern in the system even with periodic interventions by the CBN as many operators especially in the real sector lamented their inability to access the USD.


Reactions to the issues have however been mixed and largely measured. Analysts who spoke to THISDAY welcomed the renewed interest in the country’s bonds and equities explaining that if the inflow continues it would buoy the value of the Naira against the dollar.

According to Head, Research and Intelligence at Meristem Securities, Bashir Lawal, the increase in foreign reserves was what the CBN hoped to achieve with its policy of deregulating the FX market. He, however, added that the inflow was yet to be felt, pointing out that sustained forex liquidity will lead to the Naira appreciating against the dollar.

“I will say it is the result that CBN expected when it adopted the current foreign exchange regime; it is a welcome development. A sustained inflow of it will eventually increase the value of the Naira,” Lawal stated.

Executive Director, Corporate Finance, BGL Capital, Femi Ademola, noted that the flexible forex regime witnessed low level of transaction for a long time but “the CBN has consistently been trying various policies at increasing the supply of foreign exchange to the market, the latest and most remarkable being the increase in the Monetary Policy Rate (MPR) so as to ensure a positive real yield on Nigeria’s fixed income instruments.”

Ademola believed “this latest policy may have started to pay off as we see in the investment of $270m in Treasury Bills by foreign investors. The supply of foreign exchange to the interbank market (which the investments suggest) appears to have resulted in a significant increase in transactions compared to recent experience in the market.”

“It thus follow that the new interbank foreign exchange market has stabilised and operators and foreign investors especially, may have started to accept the mode of operation. The sustenance of this development would help to stabilise the exchange rate volatility and stop the haemorrhaging of the foreign exchange reserve.”

“However, the Federal Government will need to embark on the needed fiscal reforms to support the monetary authority in the bid to strengthen Nigeria’s macroeconomic fundamentals and thus attract more long term and strategic foreign investment,” he added

However, Managing Director of Global Analytics Derivatives Consulting, Tope Fasua, was not over excited about the new trend and stated that he will not join in celebrating the renewed inflow of foreign investors into the country. He reasoned that having been burnt twice in the last eight years, Nigerians, particularly economists and research analysts, need a reorientation, begin to think differently, insisting that it was time the country looked inward.

According to Fasua, who spoke with THISDAY over the telephone: “Yes foreign investors are coming gradually but I will not join in clapping hands that they are coming back, I don’t think we should be celebrating our over reliance on foreign investors.

“We, particularly our economists and analysts, should think differently; We should look inwards at the alternatives. We shouldn’t be celebrating bond and capital money brought in by foreign investors. They bring in the money when its suits them; sometimes for political capital; when they leave they do so with more than what they came in with.

“I think we should begin to look inwards and do things differently. How come no one is convincing Nigerians to invest Nigerian money in the Nigeria Stock Exchange? Nigerians prefer to take their money to safe havens and then the foreign investors bring it back at a premium,” he stated.

Also, analysts at Eczellon Capital Ltd argued that, “the transaction in question was a one-off and as such, could be difficult to conclude that the Nigerian economy is gradually winning confidence from international investors.”

They contended that “The economic fundamentals are still largely weak and the FX market remains distorted due to the widening gap between the interbank and parallel market rates exacerbated by recent regulatory pronouncement.”

The analysts believed that, “For confidence to fully return to the Nigerian financial markets, there is a need for the exchange rates in the various FX markets to converge. This would also require the regulator being tactical in its approach and avoid actions that could destabilize the market further from its current state.”