Market News

Total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) rose by 21.4 per cent to $2.34 billion amid increased inflows from individuals and non-bank institutions.

The latest report on NAFEM obtained yesterday showed that inflows saw appreciable increases across all segments, with the exception from the inflows from the Central Bank of Nigeria (CBN), which declined during the period.

The data, obtained from the FMDQ Securities Exchange, indicated that total inflows rose from $1.92 billion in July 2024 to $2.34 billion in August 2024. The increase was driven broadly by stronger inflows from both domestic and foreign sources.

Inflows from domestic sources grew by 15.5 per cent from $1.68 billion in July 2024 to $1.94 billion in August. Also, inflows from foreign sources jumped by 62.1 per cent to $394.50 million as against $243.30 million in previous month.

A breakdown showed that inflows from domestic sources were driven by private sources with collections from individuals rising by 162.5 per cent between July and August 2024, while inflows from exporters and non-bank institutions rose by 28.3 per cent and 18.7 per cent respectively. However, inflows from the CBN declined by 53.7 per cent over the period.

NAFEM is the general forex-trading market for investors, exporters and end-users through which forex trades are made at exchange rates determined based on prevailing market circumstances, thus ensuring efficient and effective price discovery in the Nigerian forex market.

The naira also remained resilient at the weekend, closing with week with a gain of 0.3 per cent at N1,593.32 per dollar. However, turnover at declined by 24.5 per cent to $764.61 million, with trades consummated within the N1,400 and N1,650 per dollar range.

Meanwhile, Nigeria’s foreign exchange (forex) reserves also continued its descent, dropping by $1.03 million to close weekend at $36.30 billion.

Most analysts remained cautious on the outlook for the naira, citing the tepid forex situation.

“However in the coming week, baring intervention by the CBN, we anticipate continued currency pressures driven by limited forex supply amidst the expectation of an increase in demand due to seasonality factors,” analysts at Afrinvest West Africa stated in a weekend review.

Analysts at Cordros Capital expected the naira to remain under pressure due to the weak forex reserves.

“Looking ahead, we expect forex liquidity conditions to remain tepid in the near term should inflows from the CBN remain weak, which could lower market confidence and increase pressure on the naira,” Cordros Capital stated.

The latest NAFEM report came on the back of a report that showed that foreign portfolio investors were investing more than three times what they used to invest in the Nigerian stock market.

In a major boost that underlined growing confidence in the Nigerian economy and continuing reduction in liquidity risks, foreign portfolio investments (FPIs) recorded the highest level of cumulative improvement in five years by July 2024.

The latest FPIs report had shown more than 200 per cent increases in the three-way flows, with inflows recording the highest percentage increase of 227 per cent, the highest inflow size in five years.

The proportion of foreign investors’ participation in the Nigerian market, which had slumped to its lowest level in the recent past, has more than doubled, with nearly one-fifth of transactions at the Nigerian market initiated by foreign investors.

The FPI report, coordinated by the Nigerian Exchange (NGX), included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of foreign portfolio trend.

The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the equities market and the economy. While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation.

The seven-month report showed that total transactions by foreign investors rose by 222.2 per cent to N598 billion by July 2024 compared with N185.62 billion recorded in the comparable period of 2023.

The proportion of foreign participation, which was around a low of 8.62 per cent by July 2023, has risen to 19.32 per cent by July 2024, driven by three-digit improvements on the buy and sell sides.

Foreign inflows increased by 227.3 per cent from N81.47 billion by July 2023 to N266.64 billion by July 2024. Outflows rose by 218.2 per cent from N104.15 billion by July 2023 to N331.36 billion in the first seven months of this year.

The growing foreign participation boosted activities at the Nigerian market, which added almost a trillion naira in additional transaction value within the period. Total transactions at the NGX rose from N2.15 trillion in the first seven months of 2023 to N3.1 trillion in the first seven months of this year, an increase of 44.2 per cent.

The FPI report came as a Central Bank of Nigeria (CBN)’s report indicated that inflows through diaspora remittances rose by 130 per cent to $553 million in July 2024, compared with the corresponding period in 2023.

Another report released by the CBN yesterday, Business Expectations Survey (BES), showed that business owners are more optimistic about the prospects of the Nigerian economy, with notable improvements in investors’ confidence in the key sectors of agriculture and manufacturing.

Market analysts attributed the improvement in foreign participation in the Nigerian market to the gains of macroeconomic reforms.

Managing Director, AIICO Capital, Dr. Femi Ademola, said increase in foreign inflows and participation implies that foreign portfolio managers are now more optimistic about the country’s economic prospects and are increasingly looking for opportunities to invest in Nigeria.

He said such stance could send a more reassuring signal to the markets and help to moderate the country’s foreign exchange (forex) position.

The growing confidence in the economy underlines general expectations that Nigeria’s first domestic foreign-currency denominated bond may record oversubscription amidst strong demand from retail and institutional investors.

The ongoing Series I $500 million Domestic FGN US Dollar Bond, which opened on Monday, is a first-of-its-kind domestic issuance expected to have significant transformative impacts on the Nigerian financial markets and the economy.

It is a five-year bond, with bi-annual interest payment in currency of issuance, and principal payment at the expiration of the tenor.

A report by Afrinvest West Africa had indicated that FPIs in the Nigerian market could reach N1.1 trillion by the end of 2024 as foreign investors continued to increase their stakes on Nigerian securities.

Analysts at Afrinvest West Africa stated that at the current run rate, the size of foreign participation at the stock market should reach N1.1 trillion by year-end, translating to a 267.8 per cent increase on 2023, and the highest naira value since 2018 when FPIs traded N1.2 trillion.

Afrinvest estimated that total FPIs, including equities, money, and bond markets, could swell fourfold to $5.2 billion in 2024 in a base case scenario.

Analysts noted that even when adjusted at exchange rate of N1,510.10 per dollar, the current run rate should deliver about $728.4 million participation size on the NGX, representing a 60.9 per cent increase over the 2023 actual that was converted at an exchange rate of N907.10 per dollar.

“This marked improvement underscores the gradual return of foreign portfolio investors to Nigeria – a development we believe is largely connected to the ongoing reforms by the CBN,” Afrinvest stated.

The report highlighted a strong and positive correlation between FPI inflow data reported by the NBS in dollars and foreign investor participation statistics reported by the NGX in naira.

Afrinvest noted that the correlation was not a surprise given that equity is one of the three investment portfolio areas into which FPIs are deployed.

The report pointed out that although FPIs are less reliable in building sustainable foreign exchange (forex) buffers due to their characteristic nature of flight to safety, the recent dynamics if sustained hold positive for stabilising the exchange rate in the short to medium term.

Analysts noted that the relaxation of capital controls, which led to payment of forex backlogs, and financial repression tactics adopted under the last CBN regime supported the improved sentiment.

“Overall, we posit that sustaining the improvement in FPI could help support a near term easing in price and exchange rate pressures,” Afrinvest stated.

Historically, FPI contribution to annual total capital importation usually outweighs the other two sub-components, foreign direct investment (FDI) and other investment (OI), save for 2016 and 2023 when OI dominated.