SAT 05 FEB, 2022-theGBJournal- Nigeria’s FX reserves sustained its descent as it closed lower by USD136.84 million w/w, to USD39.98 billion (3rd February 2022).
Meanwhile, the naira was flat at NGN416.33/USD but appreciated by 0.4% to NGN571.00/USD at the parallel market.
In the Forwards market, the 1-month (+0.1% to NGN418.55/USD), 3-month (+0.2% to NGN424.77/USD), 6-month (+0.2% to NGN434.08/USD) and 1-year (+0.2% to NGN448.78/USD) contracts reflected appreciations of the naira to the greenback.
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 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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