INFLOWS OF FOREX RISE BY 24% AS RATES CONVERGE

Total foreign exchange (forex) inflows into the official trading channel increased by almost a quarter amid hopes that the Central Bank of Nigeria's (CBN) decision to eliminate multiple forex rates will increase forex liquidity and maintain the value of the naira.

According to trading data at the Investors and Exporters Window (IEW), which serves as a convergence market for currency trading, overall inflows climbed by 23.8% to $1.41 billion in June 2023 from $1.14 billion the previous month.

For the second consecutive month, inflows increased steadily thanks to the apex bank's elimination of multiple FX rates, which was in accordance with the priorities of President Bola Tinubu's new administration.

The FMDQ provided a breakdown of the data, which revealed rises in all supply-side categories, with international inflows showing the biggest percentage increase at 44.3%.

According to a monthly review, overseas inflows increased to $298.8 million in June of this year while domestic inflows increased by 19.3% to $1.11 billion. jumped inflows from non-bank corporates, which jumped by 35.7% to $597.10 million in June 2023, and inflows from exporters, which increased modestly by 2.3% to $448 million, were the main drivers of domestic inflows.

The continuing monetary policy adjustments, according to analysts at Cordros Capital, could have a favorable medium-term effect on the FX market.

We anticipate that as market participants' confidence grows, the ongoing changes in the forex market will lead to improvements in forex liquidity circumstances over the medium run. While awaiting the CBN's activities in clearing its currency backlogs and the direction of short-term interest rates despite high inflation, we believe foreign investors will likely adopt a wait-and-see approach in the near term, according to Cordros Capital.

Positive government policy actions may be reviving, according to Managing Director of Financial Derivatives Company (FDC), Mr. Bismarck Rewane, who made this statement over the weekend. However, there are still significant concerns to consider.

He claimed that during a protracted period of policy drift, it was pleasant to hear the federal government reverse several of its policies that had caused worry, such as the installation of a 5% value added tax (VAT) on data.

Some of the policy improvements have investors cautiously impressed, but they want to see some implementation. Positive economic news is energizing to investors in this era of political unpredictability and election petitions, Rewane said.

Although the policy is flexible, according to FDC, there are still certain issues, and even though the value of the naira has been oscillating around N800 to the dollar, the market is still only receiving small quantities of foreign currency.

Banks continue to try to influence the market, but they have finally caved in to market forces. The interest rates in the money markets are unnaturally low, and according to FDC, the next round of correction will start after a cabinet has been named.

The NAFEX and IEW spot rates will now be calculated using transactions-based methodology, which will use actual forex market transaction data, as opposed to the contributions-based model that is currently in use. This revision was previously announced by the FMDQ Securities Exchange last week. This year, on July 5, the modification became effective.

The modification, according to Cordros Capital, was in line with the ongoing domestic currency market reforms as well as the global transition to a transaction-based benchmark administration model.

Analysts predicted that the adjustments to calculation and the apex bank's decision to permit foreign oil firms (IOCs) to sell dollars to banks would have a favorable effect on the foreign exchange market.

On the one hand, we anticipate that the modifications to computation would promote transparency in the computation of spot forex rates and give a clearer image of the currency rates reflective of the market realities at various times, but with heightened intraday volatility. The IOCs' ability to sell their dollars to dealing members, on the other hand, is anticipated to improve FX liquidity in the IEW over the medium term, strengthening the local currency, according to Cordros Capital.

The most recent report on foreign portfolio investments (FPIs) at the stock market showed that foreign investor participation in the Nigerian investment sector had significantly improved. The substantial 649.6% rise in inflows was the primary driver of the 338.72 percent increase in total FPI transactions.

Total FPIs grew from a record low of N8.47 billion in April 2023 to N37.16 billion in May 2023, their highest level since June 2022, according to the data covering the month ending May 2023. On account of concerns over the political transition, the total FPI in April was the lowest in recent memory.

FPI inflows—the buy side of transactions—rose sharply from a record low of N3.67 billion in April 2023 to N27.51 billion in May 2023, the highest level since November 2021. Sell-side FPI outflows saw a slower rise of 101.04 percent, from N4.80 billion to N9.65 billion.

The FPI report, organized by the Nigerian Exchange (NGX), comprised transactions from almost all custodians and capital market players and is regarded as an accurate indicator of the FPI trend. The report combines two important indicators—inflow and outflow—to assess the sentiment of foreign investors and their involvement in the economy and stock market. Total FPI represents the velocity and degree of participation, whereas inflows and outflows indicate the direction of portfolio transactions.

When inflows exceed outflows, it simply means that foreign investors are purchasing more listed securities than they are disposing of, and when outflows exceed inflows, it suggests that foreign investors are disposing of more securities than purchasing additional securities. Hence, the excess or deficit in FPI.

The NGX highlighted that President Bola Tinubu's inauguration on May 29, 2023, which is widely regarded as the inauguration of a pro-market leader, was partially responsible for the record-breaking bullish surge that led to the May 2023 performance.