Dollar inflows seen eluding Nigeria as EM currencies rally

A weaker dollar will not provide a fresh spur to Nigeria because a nebulous exchange rate system and fiscal deficits discourage investors from investing in naira assets.

The United States (US) currency has lost latitude versus other countries, especially the euro, as investors brush off political instability and pin their hope on an economic recovery with countries relaxing lockdowns.

Any gain for the euro against the dollar ends up making developing nations more competitive in global trade against the euro zone. Put another way, it enables emerging-market currencies to appreciate against the dollar while maintaining some of their previous competitiveness.
The broader recovery in risk sentiment or rising risk appetite is paving the way for global equities outside the US to play catch-up with the S&P 500.

When the US dollar weakens, it is gradually accompanied by stronger commodities prices which boost growth in trade and trade surplus for commodity exporters.

But the multiple exchange rates adopted by the Central Bank of Nigeria (CBN), following the 2014 crude oil price collapse that depleted the external reserves, and harsh operating environment have stoked capital flight in the last five years, hence undermining inflows of foreign direct investment into the country.

Offshore investors are more concerned about their ability to repatriate foreign exchange proceeds, but lack of transformation policy on the part of the present administration has stoked investor apathy towards the equity market.

Gbolahan Ologunro, equity research analyst at CSL Stockbrokers Limited, said investors prefer emerging-market countries to Nigeria because of their exchange rate framework and lower vulnerability to macroeconomic shocks.

He said there won’t be surge in dollar inflows due to clumsy rates and that the country may not see a surge like in 2017 when the CBN introduced the Importers and Exporters’ forex window.

“The inflow will not translate into increase in appreciation for local currencies,” said Ologunro.

Wale Okunrinboye, equity research analyst at Sigma Pensions Limited, said investors are struggling to pull between $1.5 billion and $2 billion out of the country.

“We are fundamentally in a deficit. The demand for dollar is more than supply. The only sentiment is when oil price goes up as it makes up 90 percent of the country’s earnings,” said Okunrinboye.

After approving the sum of $3.50 billion IMF emergency financial support to help Nigeria tackle COVID-19 shocks, Mitsuhiro Furusawa, deputy managing director/acting chair of the Bretton Woods Institutions, expressed special interest in getting the country to follow through with unification of the multiple exchange rate.

Based on the data released by National Bureau of Statistics (NBS) on capital importation for the first quarter (Q1) 2020, the total amount of foreign investment inflows into the Nigerian economy declined by 31 percent year on year (y/y) to $5.85 billion in the quarter, from $8.51 billion in Q1 2019.

“In our view, the decline in portfolio investment was due to global risk-off sentiment towards EM assets due to elevated vulnerabilities brought by the outbreak of COVID-19 which led to a steep fall in commodity prices,” said analysts at CSL Stockbrokers Limited.

“We recall that the sharp decline in oil prices triggered by faltering global demand for crude ignited fears of a devaluation in the local currency,” said the analysts. This made FPIs to trim down their positions in naira-denominated assets and Nigeria’s dollar-denominated assets.

To fend off the shock of the coronavirus pandemic on the external reserves, the CBN devalued the local currency by adjusting its intervention rate in I & E window upwards to N380/$ from N366/$.

The insidious virus has shattered Nigeria’s economy as Brent crude oil fell from $70 per barrel at the dawn of 2020 to $20 per barrel as of April 22, 2020.

That forced the Ministry of Finance to cut the budget benchmark to $25 a barrel from $57, which further compounds the woes of operators in the industrial goods sector that depend on government capital expenditure spending to jack up revenue.

The foreign reserves have shed over 12 percent, from $38.54 billion on January 1, 2020 to $33.63 billion as of April 23, 2020.