FPIs: Nigeria's FX Reform Half-Done Till CBN Clears Backlogs - Investment Firms

FPIs: Nigeria’s FX Reform Half-Done Till CBN Clears Backlogs – Investment Firms

After a decision to unify its multi-tiered exchange rates, foreign currency has not started flowing into the Nigerian economy as there is an obvious gap in forex supply and demand in the official markets.

Exchange rates have slumped and the outlook remains unclear as the apex bank backlogs deter foreign investors participation. Though, the move to unify rates has sent a positive signal across the markets, and MSCI halted a plan to downgrade Nigeria’s indexes, citing a change in managed fx policy of the government.

Yet, analysts maintained that the domestic equities and fixed income markets are still dominated by local investors after record exits were reported in the recent past. Financial experts and investment banking firms are of the opinion that fx reform is not complete without an improved supply side.

The weak macroeconomic indicators, rates, and inflation conditions are among the critical factors foreign investors weigh in taking their investment decision, analysts at LSintelligence Associates told MarketForces Africa via an email.

“For now, Nigeria is high on those macroeconomic indicators doses: inflation is rising unabated, exchange rate has worsened while interest rate has climbed to all-time high amidst unfriendly unemployment rate”, the firm said. Experts opine that reform must be holistic carried out, otherwise, there will be a gap in expected results.

In their separate market reports, investment banking firms asked the Central Bank of Nigeria (CBN) to settle the backlog of foreign currency in order to attract FX inflow into the economy, saying its decision to float rate is not enough.

The apex bank bites the bullet on fx reform following a visible scarcity of foreign currency despite the fact that Africa’s largest economy depends heavily on imported goods for further production and immediate consumption.

Nigeria’s and citizens’ foreign goods taste bud continues to push exchange rates higher across the market. Analysts however believe that the FX reform will be incompleted without improved supply side at the official window, foreign investors will still remain on the sideline.

Attractive foreign capital inflows are at the core of the decision to float the naira. Investment firms have maintained that a weak macroeconomic environment and the inability to repatriate capital have also been responsible for Nigeria’s failure to attract foreign capital.

In its macroeconomic note, Meristem Securities Limited said foreign portfolio investments have made up an average of about 50% of capital inflows into the country over the past 3 years, lower than the pre-pandemic contribution of 68.22%.

“For these investors to fully return, major reforms to ensure policy consistency needs to be carried out at the fixed income money market which accounts for about 74% of the FPI inflows.

“These consistencies in policy reforms and implementations should also improve Foreign Direct Investment in the long run”, Meristem said in the report.

According to the firm, the unification of all official FX windows alone is not likely to be sufficient to unify all FX rates in the economy and reduce/eliminate participation in the parallel market especially if the FX supply remains low, existing backlogs are not cleared, and existing restrictions on importation of some items remained enforced”.

Multiasset Investment banking firm, CardinalStone Partner, said Foreign funds are still on the sidelines, with just very little participation in the bourse. Many of foreign investors are waiting to see liquidity improve at the I&E window. There is a need for the CBN to take concrete steps to clear out the FX backlogs.

“Once these conditions are met, we believe there would be a material increase in offshore participation”., CardinalStone said in its market note to investors. The investment firm also noted that fixed income focused funds normally lead the inflows, while equity funds tend to be laggards.

Analysts then said any uptick in rates would also help to motivate foreign inflows. In its note to investors, Cordros Capital Limited expects the re-introduction of the “willing buyer, willing seller” model at the I&E window to influence the exchange rate direction.

The firm said nonetheless, while the CBN’s abolishment of its multiple FX windows is positive in boosting foreign investors’ confidence, it thinks they will adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boosting FX supply to support the market in the near term. #FPIs: Nigeria’s FX Reform Half-Done Till CBN Clears Backlogs – Investment Firms

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