Trading activity in Nigeria’s Spot foreign exchange (FX) market between the banks and their clients for the week-ending December 30, 2016 stood at US$284.82 million, the lowest weekly turnover since September 16, 2016, according to data compiled by BusinessDay.
Turnover in the aforementioned week also represents a 62 percent decline from the $512.59 million recorded the previous week.
A slump in trading activity was anticipated in the 3-day business week cut short by Christmas festivities.
Some market participants said trading levels were soft due to weaker foreign exchange demand from businesses, which had closed shops for the year and a disappointing inflow of diaspora remittances.
Activity in the Spot foreign exchange market among banks for the same trading week revealed a 44 percent decrease, as a total turnover of $24.68 million (average daily turnover of $8.23 million) was recorded against the $65.17 million total turnover (average daily turnover of $13.03 million) reported the previous week, a market report obtained by BusinessDay showed.
In the week-ended January 6, 2017, the exchange rate in the Bureau-de-Change (BDC) market remained flat at ₦399 to the US$ throughout the week, while the inter-bank market rate fell by 0.08 percent to close at ₦305 to the US$ against the ₦305.25 close recorded at the end of the previous week.
As a result, the spread between the inter-bank and BDC exchange rates increased by 25 kobo to ₦94, representing a 0.27 percent increase from the spread of ₦93.75 recorded the previous week.
In the OTC FX Futures market, contracts worth $88.81 million traded in about twelve deals for the week-ended January 6, 2017, compared to the previous week’s total of $128.61 million traded in about six deals.
Nigeria’s foreign exchange market is reeling from low oil prices and weak autonomous inflows. Despite a currency float in June, liquidity is yet to return to pre-2014 levels, although inflows have since outpaced outflows since the float, which saw the naira shed almost half its value.
Foreign investors have stood on the side lines of Nigeria’s interbank foreign exchange market because of the fear that the low dollar liquidity in the market would make it difficult for them to repatriate the proceeds of whatever investment they bring in.
However, experts are betting that there will be improved liquidity in 2017.
Improved liquidity is expected on the back of several initiatives already taken by the government, which could translate into increased inflows of dollars into the country.
The first source of major dollar inflow expected in early 2017 is the proceeds of the US$1 billion Eurobond which the Debt Management Office (DMO) and the Ministry of Finance have already finalised plans to issue latest by March.
Besides the US$1 Eurobond, the federal government is also in negotiations with different multilateral lending institutions including the World Bank, the African Finance Development Bank (AfDB), among other institutions, which is expected to translate into increased dollar inflows.
In November 2016, AfDB gave Nigeria US$600 million of an agreed US$1 billion loan. The balance of US$400 million is will be given to the country this year.
The country also has an agreement in principle with the World Bank for a US$2.5 billion facility. The federal government is expected to tap into this agreement this year as part of its US$30 billion borrowing plan.
Prepayment agreement signed with India for crude oil sales will also bring in addition dollar inflows into the country in 2017.
The Minister of State for Petroleum Resources, Ibe Kachikwu has an agreement in principle with India for prepayments of up to US$15 billion for the country’s crude oil. Some payments on the back of this agreement are expected this year once finalized.
But the biggest source of improved dollar inflows in 2017 will come from higher crude oil production and the higher prices of crude oil in the international markets.
At an average crude oil price of US$55 per barrel and average production of 2.0mbpd, the country’s oil export earnings is expected to rise by a minimum of US$11 billion, boosting external reserves and strengthening the capacity of the Central Bank of Nigeria (CBN) to defend the currency.
Analysts at FBN Quest note, “Over time, other inflows will materialize. These could include sizeable multilateral loans, an asset sale or two and advance payments for crude oil. Ours is the scenario of the piecemeal solution to the exchange rate impasse. A number of transactions finally trigger the autonomous inflows on a scale to make the liberalisation a reality. The regime may not be floating but could then be termed “market-driven” (to use the CBN’s own words). This process would be more rapid, as the Egyptian example shows, if the FGN was prepared to take IMF loans. Such a step, however, is off-limits for historic reasons.”
The improvement in inflows is therefore expected to trigger their return to the market, which would ease the pressure on the naira.
The nation’s external reserves have been on a consistent rise since November, rising to a two month high of US$26.2 billion on 5 January.
LOLADE AKINMURELE
