Naira firms to N1,020/$ on parallel market, attracts investors; Speculators lose as Bureau de change operators extrapolate strength at FX market

The naira has strengthened to 970 per dollar on the black market from as low as 1,300/$ a week earlier, following some positive sentiments around the government’s plans to shore up dollar liquidity in the FX market.

The appreciation of the naira against the dollar on the parallel market has placed Nigeria on the radar of foreign investors once again according to American bank, JP Morgan after a tottering reforms initially slowed response.

“The naira now ranks highest on our risk-reward scorecard due to elevated carry, however we remain on the sidelines waiting for better line of sight on FX inflows and more consistent liquidity tightening measures,” Ayomide Mejabi, an emerging markets strategist at JP Morgan, said in a note to clients.

That’s after the Central Bank of Nigeria (CBN) is finally allowing a rise in market interest rates to match inflation and has begun to clear the foreign exchange backlog that has drained confidence in broader FX reforms.

The one-year OMO bill for instance sold for 21 percent at the last auction, double last year’s return (12 percent in December 2022) and also higher than the 17 percent yield at the first auction of this year which happened in August, according to data from the CBN.

The yield on the one-year Treasury bill has also doubled to 13.5 percent from 6.2 percent when compared to the month of June when President Bola Tinubu assumed office.

The rates are likely to rise even further, with the country’s headline inflation at an 18-year high of 26.7 percent as at September.

“T-bill and bond rates have risen, but we see scope for further upward adjustments. We expect authorities to maintain some willingness for a somewhat flexible exchange rate (at least relative to recent years),” Mejabi said.

The large backlog of unmet FX demand, which has cast a pall on the reforms in Nigeria, is also being resolved as the CBN cleared a part of it last week.

Report say the appreciation of the naira against the dollar on the streets has prompted speculators hoarding greenbacks to sell to avoid losing money.

“There are enough dollars in the market now. People are now bringing out dollars. Dollar rate will fall further next week,” Abubakar Ibrahim, a black market operator, said on Friday.

Meanwhile, the CBN has cleared outstanding matured FX forwards owed to some banks including Citigroup, Standard Chartered, and Stanbic IBTC, in a boost to investor sentiment. The local banks have not been fully settled but sources close to the presidency say they are next in line.

Nigeria hopes to secure around $10 billion of new inflows to clear the outstanding FX backlog.

“The CBN is clearing only forwards to banks. I understand that it’s done for Citi and two other international banks. I believe that their swap positions with the CBN are much smaller than what they have with the local banks such as Access, Zenith and UBA,” Tunde Abidoye, analyst at FBNQuest.

The country’s FX reserves rose to $33.39 billion on October 31 from $33.22 billion at the beginning of the month, according to data from the central bank.

Olayemi Cardoso, governor of the CBN), has reiterated that under his leadership, the apex bank will focus mainly on the core mandate of achieving price stability.

“At the end of our tenure, we want to look back and see that our policies have positively impacted people’s lives,” Cardoso said.

Yemi Kale, partner and chief economist at KPMG Nigeria, attributed naira appreciation, FX reserves accretion and the reduction in FX backlog to inflows from oil swap agreements, sales and loans.

“The government has told us the steps they are taking to improve liquidity. They talked about NNPC, swap or forward sales, which were to bring about $3 billion; recently they talked about $10 billion expected into the economy.

“So, it is possible that some of those things have started to trickle in and just as they said, their priority is clearing of the backlog in order to begin to restore confidence in the system. I think that is what is happening,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said.

He said the clearing of the FX backlog is already reflecting on the liquidity in the market and investor confidence.

He said: “So, what we need to hope for is sustainability. If they can progressively clear the backlog, that level of confidence will be sustained. If there are expectations that the dollar will continue to go down, then the speculative effect of the demand will also begin to decline so that those who have money will quickly begin to offload it.

“If people expect that the dollar will go down further, based on what they are seeing, it will continue to go down so those who are speculating will also begin to offload it so that they do not lose money and that will continue to improve the liquidity.

“If all the things they said about forward sales, the liquidity from the $10 billion begin to happen, we can gradually make some progress in terms of restoring confidence and sustaining stability in the market.”

Wale Edun, the finance minister and coordinating minister of the economy, said on October 23 the country was expecting as much as $10 billion in new foreign currency inflows in the next few weeks to ease acute dollar shortages in the FX market.

Okikioluwa Oladipo-Ajilore, global markets associate at Parthian Partners said: “As of October 2023, Nigeria’s external reserve stood at $33.34 billion, coming from $33.25 billion in September 2023. This is not a significant increase; however, we attribute this to the improvement in the crude oil prices alongside volume produced during the period.

“On the back of the CBN clearing the FX backlogs, we have witnessed an appreciation in the naira due to improved dollar supply in the system. Though this backlog has not been fully cleared, we hold that its sustainability would be a factor of whether this recent trajectory of inflows from FPIs and other actions that have grown the optimism in the space are maintained.”

However, the Association of Bureau De Change Operators of Nigeria (ABCON), on Sunday revealed why the naira is regaining strength against the dollar.

“The development stems from the ‘double-edged sword dollar liquidity injection and the mopping up of the naira through interest rate hikes,” its President, Alhaji Aminu Gwadabe, said in a statement on Sunday in Lagos.

“What is happening in the market and the continued naira rebounds is the manifestation of the CBN double-edged sword measures of dollar liquidity injection and naira mopping through the instrumentality of interest rates hikes.

“It is a good development as it is a greater risk to speculate, hoard and substitute naira for other currencies,” Gwadabe said.

The ABCON boss, however, said that the speculators are usually interested in the elements of sustainability of the feat so far achieved, arguing that it is panic selling as against panic buying.

Gwadabe urged the management of CBN to continue to make clarifications and implement some of the association’s recommendations in charting a way forward for naira stability in the FX market.

Among the recommendations, he said, is the inclusion of the BDCs in the foreign exchange market in view of their roles in meeting the needs of the critical retail end sector.

“The BDCs are necessary in the demand measures of the apex bank, transaction monitoring mechanism and clients utilisation with correcting and moderating potentials,” Gwadabe said.

The financial expert said that the country is experiencing increasing reserves due to increased demand for crude oil, its major export commodity.

“This is due largely to the U.S. increasing inventories and the escalation of tension in the Middle-East,” he explained.

“As we continue to observe developments, there is the need to exercise caution in attacking the naira as it all appears that the CBN seems poised to sustain the gains already recorded at the market,” Gwadabe said.