Nigeria’s FX market is at its most liquid in 4yrs
There are reasons to suggest that Nigeria’s foreign exchange market is at its most liquid since 2015.
FX trading activity between Nigerian banks and their clients rose to a four-year high in February, as foreign investors pile into the bond market after a somewhat successful presidential election that saw President Muhammadu Buhari secure a second term in office.
Total foreign exchange transactions in the month of February settled at a record $8.15 billion, implying a daily turnover of $407.38 million, according to figures released by FMDQ OTC, a securities trading platform.
That’s about the most liquid the fx market has been since 2016 when acute foreign exchange shortages sent foreign investors fleeing and contributed to the country’s first economic contraction in a quarter of a century. The situation has been much better since then, and on the evidence of the recent fx activity, investor confidence is probably at its best since then.
The increased foreign inflows in the past one month is no wonder the naira has strengthened to N357/$ in the parallel market from N363 at the beginning of the New Year, while the Central bank’s external reserves have improved to $43 billion as at the end of February from $40 billion in January. Increased autonomous foreign inflows put less demand on the CBN’s dollar reserves.
Most of the foreign cash that has piled into Nigeria since February went to fixed income government securities especially one year treasury bills, judging by the recent decline in yields.
Since the start of the year, yields on government treasury bills are down some 200 basis points on average, with most of that decline happening in February, the month when Nigerians handed President Buhari a second term.
Buhari beat his closest contender, Atiku Abubakar by a margin of 3.9 million votes.
Tracking FX inflows through the Investors & Exporters (I&E) window confirm strong foreign portfolio participation in the fixed income market, post-election.
Some $4.28 billion was traded in the week-ended March 1, 2019 at the I & E window, an increase of 120.62 percent or $2.34 billion.
The increased activity is attributable to the relatively peaceful conclusion of the presidential elections and investors’ expectations for a stable currency following President Buhari’s win, according to Tejumade Olajide, an analyst at FMDQ.
Prior to the conclusion of the elections, investors adopted a wait and see approach due to the heightened uncertainty surrounding the Nigerian economy and financial markets.
“However, the election results signalled continuity in economic policies adopted by the incumbent party with respect to the current foreign exchange regime, and that has instilled renewed investors’ confidence in the Nigerian markets,” Olajide said in a March 10 note to Business Day.
The equities market has not been as attractive for foreign inflows compared to the fixed income market.
Unlike in 2015, there has been no post-election rally in the equities market this year, as stocks remain flat since Feb 27.
“Right now, in the short term, the only catalysts we see for the equities market will be earnings releases, corporate actions and investors looking for strong dividend payouts and yield,” said Lanre Buluro, a director of sales at investment bank, Chapel Hill Denham.
Zenith Bank (11.4% dividend yield) and Dangote Cement (8.2% dividend yield) already came through and could be a signal for more to come.
“Post earnings, internal catalysts for the markets will emerge from the actions (or inactions) and policies of the re-elected administration of Buhari,” Buluro added.