Amid the appreciation of the naira against the dollar on the parallel market, Nigeria is on the radar of foreign investors once again after a seeming slowdown in reforms initially saw them grow cold feet towards West Africa’s biggest economy.
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 rise in market rates is making Nigeria attractive again, according to American bank, JP Morgan.
“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.
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.
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.
BusinessDay learnt that 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.
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.”