SAT 15 JAN, 2022-theGBJournal- Nigeria’s FX reserve recorded its first weekly accretion in the past two months, as it increased by USD13.19 million w/w to USD40.51 billion (12th January 2022).
Meanwhile, the naira depreciated by 0.1% w/w and 0.3% w/w to NGN416.50/USD and NGN572.00/USD at the I&E window (IEW) and parallel market, respectively.
In the Forwards market, the naira rate depreciated at the 1-month (-0.1% to NGN417.04/USD), 3-month (-0.1% to NGN422.92/USD), and at the 1-year (-1.0% to NGN447.12/USD) contracts, but appreciated at the 6-month (+0.1% to NGN432.10/USD) contract.
In our opinion, the Central Bank of Nigeria (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 quite 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 be significant in attracting foreign inflows back to the market.
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