SAT 04 DEC, 2021-theGBJournal- Nigeria’s FX reserve declined for another week following efforts by the CBN to support the naira at the official channels. Particularly, the gross reserves closed lower by USD124.86 million w/w, to USD41.15 billion (1st December 2021).
Meanwhile, the naira appreciated by 0.1% w/w to NGN414.73/USD at the I&E window (IEW) but depreciated by and 0.2% w/w to NGN565.00/USD at the parallel market.
At the IEW, total turnover (as of 2nd December 2021) declined by 22.7% WTD to USD772.53 million, with trades consummated within the NGN404.00 – 457.86/USD band. In the Forwards market, the 1-month (NGN416.07/USD), 3-month (NGN421.33/USD), 6-month (NGN430.47/USD) and 1-year (NGN448.13/USD) contracts traded flat relative 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 further adjustments in the NGN/USD peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.
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