Foreign inflow: NGX recorded a continued drop that extended to April – Report

NIGERIA, May 29 – The Nigerian Exchange Limited (NGX) has reported drop in the value of foreign inflow by 19.14 % for month-on-month to N42.58bn in April from N52.66bn in March.

This report was observed by our team on the NGX’s Domestic & Foreign Portfolio Investment Report  for the month of April.

According to The PUNCH, On the flip side, foreign outflow worsened by 88.10 % to N78.25bn from N41.60bn in March, showing that foreign investors’ desire for the local equity market was still down.

This drop  followed a pattern that had been observed since January this year, as foreign outflow steadily grew from N37.33bn in January to N40.88bn in February.

Total foreign transactions recorded an increase of 28.19 % to N120.83bn in April compared to N94.26bn in the prior month.

The PUNCH has it that “The local bourse lost about N3.54tn in April on the back of bearish trades, as investors looked for improved yields on alternative markets.

“Meanwhile, $1.30bn worth of cleared USD/naira-settled non-deliverable forwards open contracts on the FMDQ securities is due on Wednesday.

“Cleared naira-settled non-deliverable forwards are contracts where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US dollar on the maturity/settlement date”.

At the point of maturity, both parties are believed to have transacted at the spot FX market rate.

According to the FMDQ, the cleared USD/NGN NDFs contracts are cash-settled in naira and the differential between the contract rate and the Nigerian Autonomous Foreign Exchange Fixing rate on maturity day determines the settlement amount, i.e., the gain/loss in the contract.

The product, which can be used for hedging, was introduced in 2016, with the Central Bank of Nigeria as the pioneer seller of the cleared USD/NGN NDFs contracts.

The apex bank currently offers amounts for different tenors, ranging from 13 months to 60 months, to authorised dealers, who in turn offer the same to customers with trade-backed transactions or trade the same with other authorised dealers; settling on bespoke maturity dates.

Speaking on the due cleared USD/NGN NDFs contracts, a financial market analyst, Olaide Baanu, said, it would require a huge payment from the CBN, which could impact the value of the local currency.

“The settlement of $1.3bn implies a cash payment of approximately N1.8tn from the Central Bank of Nigeria based on the NAFEX rate of around N1,400/dollar. If this volume of naira is paid by the CBN, it is likely to lead to further depreciation of the naira beyond the CBN’s target or desired range. Market participants are expected to use the excess naira liquidity to repurchase USD, putting additional pressure on the naira’s value.

“Regarding whether the CBN has sufficient naira volume to make such a payment, it would depend on various factors such as the CBN’s foreign exchange reserves, monetary policy objectives, and the potential impact on domestic liquidity and inflation.

“In response to such a significant cash outflow, the CBN may need to intervene in the foreign exchange market to stabilize the naira’s value before and after the payment.”

According to Baanu, the said intervention may likely required measures to bring down the official exchange rate to around N1,000/dollar or possibly give promissory notes to manage the liquidity impact and prevent excessive circulation of naira at once.