IOCs FX Sales to Banks Positive for Naira Recovery –Analysts
Analysts anticipate a significant spike in foreign currency inflows at the Investors’ and Exporters’ FX market as the Central Bank of Nigeria (CBN) permits International Oil Companies (IOCs) to sell their US dollars earnings to deposit money banks.
The policy, a reversal of the previous practice, mandated the oil majors to sell their forex earnings to the apex bank. Several financial experts and economists told MarketForces Africa that the new policy will drive foreign currency inflows into the official FX market.
Battling with the US dollar liquidity shortage in the domestic economy, Nigeria has continued to search for a market clearing rate after a decision to float the local currency.
The monetary authority will continue to fine-tune FX policy to align with the economic profile and desired results, Economic Research experts at LSIntelligence said in an email reply to MarketForces Africa, adding that one of such moves is its decision to allow IOCs to sell directly to local deposit money banks.
By consensus, Bradstreet analysts said they are of the view that the move will increase foreign currency inflows into the official window in the second half of 2023, thus reducing the core FX liquidity shortage in the space, saying this may add weight to the naira exchange rate in 2023.
“… IOCs being permitted to sell their $ to dealing members will likely increase FX liquidity in the Investors and Exporters FX window over the medium term, supporting the local currency”, said, analysts at Cordros Capital Limited.
The naira has lost value due to the sustained weakness in the FX supply side over the years. Oil receipts came under pressure in the first half of 2023 due to Nigeria’s inability to meet the OPEC+ daily quota.
“The CBN understands that there is a need for liquidity level in the forex market to meet demand from manufacturers, other corporates for imports…The apex bank will continue to study the market to spot loopholes and where opportunities lie”, LSintelligence Associates said.
In the forex market, US dollar liquidity has remained depressed below the pre-pandemic period, causing a systematic decline in the local currency amidst inflation pressures.
The negative net position at the investors’ and exporters’ FX window is negative for the local currency rate versus the US dollar as foreign investors maintained their distance from the economy.
The CBN still owed a large sum to foreign investors for repatriation, and another $500 million Eurobond is due on July 12 for repayment amidst dwindling foreign reserves.
The improved supply side will bode well for the local currency valuation, Broadstreet analysts told MarketForces Africa, adding this will kick start a quick recovery for the undervalued Nigerian naira. Data from the FMDQ platform showed that the total inflows into the Investors & Exporters Window (IEW) increased for the second consecutive month.
Forex inflows jumped by 23.8% month on month to $1.41 billion in June from $1.14 billion in May, analysts at Cordros Capital Limited said in a note to investors.
Though foreign inflows spiked by 44.3% in the month to $298.8 million, it remained underwhelming relative to pre-pandemic levels at a monthly average of $1.56 billion in 2019.
Despite the apex bank’s decision to bite the bullet with a significant devaluation of the local currency, Cordros Capital analysts are of the view that foreign investors continue to be cautious about returning in their droves.
They linked foreign portfolio investors’ apathy to uncleared FX backlogs owed by the apex bank to multinationals, airlines, and others that were unable to upstream funds offshore. However, local inflows rose further by 19.3% in June to $1.11 billion because of higher inflows from non-bank corporates and exporters.
Analysts’ notes showed that corporate inflows into the window rose by 35.7% in the month to $597.10 million and exporters did a 2.3% increase in FX inflows to $448 million in the same month.
“We expect the lingering reforms in the FX market to translate to improvements in FX liquidity conditions over the medium term as market participants’ confidence builds up.
“However, we think foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation”, Cordros Capital projected. #IOCs FX Sales to Banks Positive for Naira Recovery –Analysts FBNH Rises to N682bn on ‘Special Stock Bet’
