SAT 19 FEB, 2022-theGBJournal- Nigeria’s FX reserves sustained its descent as it closed lower by USD72.14 million w/w, to USD39.78 billion (15th February 2022).
Meanwhile, the naira depreciated by 0.1% w/w to NGN416.75/USD at the I&E window (IEW) but was unchanged at NGN576.00/USD at the parallel market.
At the IEW, total turnover (as of 17th February 2022) declined by 24.5% WTD to USD429.70 million, with trades consummated within the NGN410.00 – 453.11/USD band.
In the Forwards market, the naira rate appreciated at the 1-month (+0.1% to NGN418.34/USD), 6-months (+0.1% to NGN433.45/USD) and 1-year (+0.1% to NGN448.06/USD) contracts but was flat at the 3-months (NGN424.15/USD) contract.
In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low.
Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market
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