FX market activity dips to 8-month low

The average daily turnover in Nigeria’s spot foreign exchange (FX) market between banks and their clients fell 30.6 percent to an eight-month low of $223.7 million in July from $322 million the previous month, as the impact of softer foreign inflows into Africa’s largest economy extends to its currency market.

According to data compiled by BusinessDay from FX trading platform, FMDQ, the average daily turnover for July is the lowest since November 2017 ($223.4 million) and represents a 36 percent decline from when deals hit a two-year peak of $367 million some four months ago in April 2018.

The decline is as a result of softer foreign inflows into the country which is expected in a typical pre-election year, according to Wale Okunrinboye, head of research at Lagos-based Pension Funds Administrator, Sigma Pensions.

“Across both equity and debt, foreign interest is receding, but beneath that, are also structural underpinnings like lower flows to Emerging Markets,” Okunrinboye said.

“However, we are having it worse due to soft foreign appetite for naira assets ahead of the elections,” he added.

Despite the foreign capital reversals from Nigeria on the back of rising interest rates in the US and domestic political tensions, the naira has been relatively stable and is one of the best performing emerging market currencies.

The exchange rate has hovered between N360- 363 per US dollar this year at the Investors and Exporters window, gaining less than one naira to close at N362 per US dollar in the week ended August 10.

Meanwhile the CBN official rate rose by ₦0.05 to close at $/₦306.00, indicating a 0.02% depreciation when compared to $/₦305.95 recorded the previous week-ended August 3, 2018, while in the Bureau de Change (BDC) market, the exchange rate remained unchanged to close at $/₦360.00.

“Stability reflects the fact that the naira is a peg and the peg enforcer (which is the CBN) has the ability to keep the peg where it is due to the strong level of the external reserves,” one trader told BusinessDay.

Nigeria’s external reserves stood at $46.8 billion as at August 8, according to the central bank data, with higher global oil prices providing an helpful boost over the past one year. Brent crude, an international benchmark, has gained 8.6 percent this year alone and was trading at $73 per barrel as at Friday August 10, more than double the average price in 2016.

“This reflects a firm fundamental picture, given where the oil price is, which has pushed the current account back into surplus. So while there has been some pressure, the CBN has been able to meet it fairly comfortably,” another trader said.

Higher oil prices usually spurs positive investor sentiment about Nigeria, but this time things are different, with the 2019 presidential elections barely six months away.

The 2019 election looks set to be one of the most tightly contested general elections since the return to democratic governance, as the opposing People’s Democratic Party (PDP) seeks to return to power after defeat in the last general elections to the All Progressive Congress (APC) snapped a 16-year rule.

This has taken a new twist following the recent coalition by the PDP and 38 other political parties to field a single candidate to pose a formidable challenge to the incumbent. More than fifty lawmakers and two state governors have quit the APC in the past two weeks, with the vast majority switching allegiances to the PDP.

Both parties have struggled with internal divisions but the mass defections seems to be breathing new life into PDP which ruled since the end of military rule in 1999, prior to President Muhammadu Buhari’s election in 2015.

The economy has been at the fore front of the political spat.

Nigerian stocks are almost unrecognisable from their world-beating rally less than eight months ago as the rising political tensions and broader emerging-market sell off took a further toll on stocks Friday, with the index falling 2 percent to 35,446 points, bringing the decline since its 2018 high on January 19 to 21 percent, effectively tossing the market into bear territory.

“Despite improving macro-economic fundamentals and better earnings outlook for listed companies, valuations of counters on the exchange has continued to decline as investors shun emerging and frontier markets  particularly Nigeria on the back of heightened political risks,” analysts at Lagos-based Cardinal Stone Partners said in a note to clients.