SAT 11 DEC, 2021-theGBJournal- Nigeria’s FX reserve remained under pressure, declining by USD187.63 million to USD40.93 billion (8th December 2021) as the CBN continued to support the naira at the official channels.
Meanwhile, the naira depreciated by 0.1% w/w to NGN415.10/USD at the I&E window (IEW) and by 1.2% to NGN574.00/USD at the parallel market.
At the IEW, total turnover (as of 9th December 2021) increased by 32.3% WTD to USD1.16 billion, with trades consummated within the NGN404.00 – 464.75/USD band. In the Forwards market, the naira was unchanged at the 1-month (NGN416.08/USD), 3-month (NGN421.31/USD), and 6-month (NGN430.39/USD) contracts, but appreciated at the 1-year (+0.1% to NGN447.92/USD) contract.
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.