Market News

…Experts forecast surge in reserves, foreign assets

By Chinwendu Obienyi

The naira regained momentum in the parallel market on Thursday, supported by a reduced demand for foreign exchange (FX).

The stabilisation comes amidst efforts to address Nigeria’s FX challenges with experts attributing the development to multiple factors, including an anticipated increase in FX reserves and net foreign assets.

After a five-day rally, the naira faced pressure from increased dollar demand earlier in the week, leading to depreciation across various FX market segments.

Daily Sun investigations revealed that across markets in Lagos and Abuja, the naira recovered by N25/$1 as businesses reduced their demand for FX after Bureau De Change (BDC) operators had previously complained that the amount of FX in the market had declined significantly.

Amid speculative activities, the local currency traded at N1,690/$1 yesterday compared to N1,715/$1 on Wednesday at the parallel market.

On the other hand, the naira at EFEMS whic  appreciated by 4 basis points to close at N1,548.46/$1 on Wednesday, grew by 0.1% to close yesterday at N1,547.46/$1.

As a result, analysts have predicted a rise in Nigeria’s FX reserves and net foreign assets due to government policies aimed at boosting foreign inflows, optimizing oil revenues, and managing capital flight.

Sharing their insights, they noted that the bonds had higher coupon rates than previous issuances but were aligned with market expectations given the higher US government bond yields and added that this is a positive move which will bolster Nigeria’s financial standing and increase the CBN’s ability to manage FX reserves.

“The market for new sovereign Eurobonds is fickle. The managers of these issues have to time the mood of the market carefully. There are brief periods, or ‘windows’ when conditions are right.

The end of November was one such period. Nigeria had received a very good scorecard from the World Bank in the October issue of its bi-annual Nigeria Development Update, and international investors were doubtless impressed.

Market comment on the day suggested that the DMO was generous with its coupons. By contrast, we believe

Eurobonds. The answer is that all US dollar Eurobonds are priced relative to US Government bond yields, and these used to be much lower than they are today.

For example, when the existing FGN Jan 2031 bond was priced on 14 Nov 2018 with a coupon of 8.747%, the 10-year US Government yield was 3.06%, giving was priced on 2 Dec 2024 with a coupon of 9.625%, the US Government 10-year yield was 4.17%, giving a spread of 5.46 percentage points, a very similar spread to that of the earlier issue.

“We have used the US Government 10-year yield as a convenient benchmark. Those pricing these bonds last week would have also looked at the 6.5-year US Government maturity to assess their pricing.”, analysts at Coronation Research said.

Analysts at FBNQuest, stated that the inflows from FPIs and the Eurobond proceeds are expected to enhance the CBN’s reserves and net foreign assets.

Nigeria’s reserves are projected to grow steadily, supported by capital inflows from FPIs which are capitalising on favorable carry trade opportunities stemming from high interest rates”.