SAT 25 DEC, 2021-theGBJournal- Nigeria’s FX reserve sustained its decline as the Central Bank of Nigeria (CBN) maintained its interventions in the FX market. Thus, the gross reserves closed lower by USD69.31 million w/w, to USD40.60 billion (22nd December 2021).
Meanwhile, the naira was flat at NGN415.10/USD at the I&E window (IEW) but appreciated by 0.2% w/w to NGN572.00/USD at the parallel market. At the IEW, total turnover (as of 24th December 2021) declined by 16.8% WTD to USD1.01 billion, with trades consummated within the NGN404.00 – 469.98/USD band. In the Forwards market, the naira rate appreciated at the 1-month (+0.3% to NGN414.84/USD), 3-month (+0.1% to NGN420.22/USD), 6-month (+0.3% to NGN428.30/USD), and at the 1-year (+0.6% to NGN444.57/USD) contracts.
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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