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Nigerian Financial Markets In Bated Breath Amidst Pressure

Nigerian financial markets came under renewed pressure yesterday amidst concerns over the nation’s currency valuation, corporate earnings and foreign capital inflows.

The naira hit a low of N570 per dollar at the parallel market, weaker than N565 per dollar exchanged at the weekend.

Nigeria’s sovereign equities index indicated average decline of 0.25 per cent at the stock market yesterday, worsening the negative returns on Nigerian equities to average year-to-date return of -3.5 per cent.

With this, the aggregate market value of all quoted equities at the Nigerian Exchange (NGX) Limited depreciated by N51 billion within the trading hours yesterday.

The naira has been under pressure for nearly three weeks, losing significantly at both the official and parallel markets. The free fall was due to scarcity of dollars under a very high demand from manufacturers and foreign exchange end users.

However, naira started major recovery after Nigeria raised $4 billion from Eurobond issuance and a Central Bank of Nigeria (CBN) threat to sanction speculators in the foreign exchange (forex) market.

At the official Investors and Exporters (I & E) Window, the naira was flat at N414.83/$. Most participants maintained bids between N400.00 and N415.20 per dollar.

Analysts were unanimous that the pricing patterns at the money and capital markets were linked with the naira valuation and exchange rate as the nexus between the markets.

Many analysts attributed the tepid performance of the Nigerian stock market to low foreign investors’ appetite. Foreign portfolio investors, which had accounted for some half of transactions at the stock market, were concerned over availability and value of naira.

We expect bearish sentiment to dominate the next trading session due to the absence of any positive catalyst,

Afrinvest Securities stated yesterday, after the stock market closed negative.

The All Share Index (ASI) – a value-based common index that tracks all share prices at the NGX, a generally accepted barometer of the Nigerian stock market, closed lower at 38,864.33 points as against its opening index of 38,962.28 points.

Aggregate market value of all quoted equities at the NGX also declined from its opening value of N20.300 trillion to close at N20.249 trillion. The market was weighed down by losses suffered within the high-cap stocks, where foreign investors hold substantial influence. The NGX 30 Index, which tracks the 30 largest stocks at the stock market, posted above average decline of -0.39 per cent.

Hassan Abdul, a bureaux de change trader based in Ogba Lagos, said improved dollar liquidity will push currency speculators to offload greenback for fears of losing their capital, and cause eventual appreciation of the naira.

Virag Forizs, emerging markets economist at Capital Economics, said the pressure on the black market could abate if the central bank lifts currency restrictions on imports.

Nigeria has been battling dollar shortages brought on by low oil prices, which worsened with disruptions linked to COVID-19. The central bank has devalued the currency three times since March last year, but the naira has continued to weaken.

The currency has been hitting new lows on the black market since the central bank action. It has traded within a range on the official market, supported by the central bank.

Forizs said:

It’s hard to square Nigeria’s weak economic outlook with such high levels of interest in its Eurobond issuance. The appetite for Nigeria’s Eurobond is probably related to the high returns offered, and possibly to oil price developments.

With oil prices at the current levels, investors may feel more comfortable lending to Nigeria.

The depreciation of the naira against global currencies worsened after the CBN stopped dollar sales to bureaux de change (BDCs) and barred Microfinance banks from handling forex transactions.

The fall in the naira rate to this new low has been linked to dollar scarcity and forex speculators hoarding the available greenback to maximize profit.

In an emailed guide to investors, an economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said delayering of the multiple exchange rate system which had bedeviled the Nigerian economy had been a subject of controversy for a long period.

Now that it appears settled we should expect a crawling peg method and an increase in forex supply to ensure equilibrium in the market. That notwithstanding the CBN’s attempt to mop up excess liquidity could serve as a temporary antidote to consumer price inflation which still remains stubbornly high (18.12 per cent), Rewane said.

Rewane had attributed the naira’s continued decline to heightened forex supply shortage, demand pressure and rationing.

He said naira rates convergence would require adoption of a full floating exchange rate system determined by the forces of demand and supply.

 

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