Uncertain FX Policy Marks Nigeria Unattractive Economy for Foreign Investors
Godwin Emefiele, CBN Governor

Uncertain FX Policy Marks Nigeria Unattractive Economy for Foreign Investors

Nigeria’s lack of foreign exchange policy clarity and appropriate repatriation mechanism have been identified as key factors keeping foreign investors away from the economy. Foreign portfolio inflow for the month of May dropped tremendously, from the pre-pandemic level of $1.5 billion to $124.3 million per month.

Due to scarce dollar inflow, Central Bank of Nigeria (CBN) has resulted to a number of unorthodox policies to ensure the external reserves do not run dry.

Despite these measures, the nation’s foreign reserves has fallen to $34 billion, which analysts polled by MarketForces Africa confirmed to be low for 5 months import cover.

The decline in external reserves has however been attributed to the CBN market intervention. Though, financial market data indicates that dollar supply into the investors and exporters window remained below the pre-pandemic level.

Nigeria has yet to be able to raise the nation’s external reserves position despite increased prices in global oil market. Brent recently crossed resistance level as it trades above $70 per barrel in the first week in June, 2021.

However, report from the National Bureau of Statistics (NBS) for the first quarter pegged the country’s output at 1.72 million barrels per day amidst total compliance with the Organisation of Petroleum Exporting Countries (OPEC) quota.

In a report, CSL Stockbrokers Limited affirmed that foreign portfolio investments aversion has persisted due to lack of clarity on foreign exchange repatriation measures.

Uncertain FX Policy Marks Nigeria Unattractive Economy for Foreign Investors
Godwin Emefiele, CBN Governor

It said over the last few months, the Naira has been relatively stable at the Investors and Exporters window, supported by elevated crude oil prices, while the parallel market rate remains pressured due to elevated demand.

Based on the data from FMDQ, CSL Stockbrokers said total foreign portfolio inflow for May was US$124.3 million, which remains significantly lower than the pre-pandemic level of about US$1.5 billion monthly.

Furthermore, analysts explained that foreign portfolio investors funds which historically contributed about US$13.4 billion on average to the total FX reserve now accounts for about US$5.1 billion.

“This weakened inflow, therefore, explains the low liquidity at the investors and exporters window, which has averaged US$78.1 million in 2021 when compared with the pre-Covid level (first 3 months of 2020) of US$1.7 billion”, CSL Stockbrokers noted.

The investment firm also confirmed that the elevated crude oil price at US$71.6/bbl has not translated to an increase in external reserves, which is currently down by 3.2% year to date.

“In our view, while we acknowledge that weakened foreign portfolio inflows could have contributed to this, we strongly believe foreign repatriation has intensified over the last few months.

“To validate this claim, we observed that across the spot and forward markets, the CBN remains a net seller, as net flows have been negative since the start of the year”, CSL Stockbrokers said.

As such, analysts added that the total CBN’s intervention since the start of the year averaged about US$841.6 million per month.

“This must have reduced FX backlogs significantly albeit no official backlog estimates from the apex bank had been provided”, analysts remarked.

“In our view, as global risk aversion eases, foreign investors’ interest in risky assets in emerging economies should improve. However, despite the strong carry trade that exists, foreign inflows are likely to remain tepid, save for clarity on FX policy and repatriation mechanism.

“Overall, we forecast the CBN will likely devalue the Naira by about 5-7% by year-end to unlock FX liquidity and curb the external imbalances, which is projected at US$10.80 billion, representing 2.1% of the GDP for 2021”, CSL Stockbrokers said.

Uncertain FX Policy Marks Nigeria Unattractive Economy for Foreign Investors