Forex: Investors adopt wait-and-see approach to CBN’s policy

By Chioma Obinagwam

As Nigeria’s apex monetary authority, the Central Bank of Nigeria’s (CBN’s) latest policy on Foreign Exchange (Forex) gains momentum, investors in that segment of the economy would likely react by assuming a wait-and-see stance to it.

Confiance News gathered from the weekly report of Cordros Research on Saturday.

“In the weeks ahead, we expect the re-introduction of the “willing buyer, willing seller” model at the IEW to influence the exchange rate direction. Nonetheless, while the CBN’s abolishment of its multiple FX windows is positive in boosting foreign investors’ confidence, we think they will adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boosting FX supply to support the market in the near term,” it said.

Moreover, Confiance News gathered that although declined by $86.76 million on June 26, the naira appreciated by 0.1 percent to close at N769.25 to a dollar at Investor and Exporter window (IEW).

According to Cordros Research, “Nigeria’s FX reserve continued to decline, as the gross reserve position declined by USD86.76 million w/w to close at USD34.22 billion (26 June). Meanwhile, the naira appreciated by 0.1% to NGN769.25/USD at the I&E window (IEW). On activity levels, the total turnover (27 June) at the IEW fell by 30.6% WTD to USD443.78 million, with trades consummated within the NGN465.00 – NGN841.00/USD band. In the Forwards market, the naira depreciated across the 1-month (-0.1% to NGN764.99/USD) and 3-month (-0.1% to NGN785.13/USD) contracts, while it appreciated at the 1-year (+0.1% to NGN878.26/USD) contract. Conversely, the naira closed flat at the 6-month (NGN815.39/USD) contract.”

Excerpts:

Nigeria

Domestic Economy

According to the recently released data by the Debt Management Office (DMO), Nigeria’s public debt outstanding increased by 7.8% q/q to NGN49.85 trillion in Q1-23 (Q4-22: NGN46.25 trillion). The increase primarily reflects new borrowings to fund the 2023E budget deficit, given higher expenditure relative to the rise in revenue. Accordingly, the total domestic debt stock rose by 9.7% q/q to NGN30.21 trillion, while the external debt outstanding increased by 5.0% q/q to NGN19.64 trillion. That said, the DMO noted that the CBN’s Ways & Means Advances would be included in the Q2-23 debt data since it received the National Assembly approval to securitise it in May 2023. We now expect the public debt profile to settle at NGN89.11 trillion (or 42.4% of GDP) in 2023E (2022FY: NGN46.25 trillion or 23.2% of GDP). Our expectation is hinged on the (1) securitisation of the CBN’s Ways & Means Advances, (2) new borrowings to fund the 2023E deficit, and (3) impact of FX liberalisation on the naira value of external debt. Notably, we expect the local currency depreciation to add NGN11.32 trillion to the public debt outstanding in 2023FY.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions on the local bourse increased by 68.9% m/m to NGN322.92 billion in May (April: NGN191.21 billion) – its highest level since May 2022 (NGN607.25 billion). Decomposing the breakdown provided, we highlight that domestic transactions (88.5% of total transactions) grew by 56.4% m/m to NGN285.75 billion while foreign transactions (11.5% of market transactions) also printed higher at NGN37.16 billion (April: NGN8.47 billion). Notably, net foreign transactions (NGN17.86 billion) settled at their highest level since December 2017, likely due to investors’ optimism about reforms from a new administration. We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher FI yields may constrain buying activities. At the same time, while foreign investors are likely to adopt a wait-and-see approach in the near term, we expect to see improvement in foreign participation over the medium term. Our expectation is hinged on the policy pronouncements and reforms by the current administration, undoing the policy mistakes of the past eight years.

Capital Markets

Equities

Amid the shortened trading week due to the public holidays on Tuesday and Wednesday to mark the Eid-el-Kabir celebrations, the domestic bourse continued its uptrend as sustained bargain-hunting activities in blue-chip stocks pushed the All-Share Index above the 60,000 psychological mark to close at 60,933.94 points – the highest level since May 2008. Remarkably, the market traded positively in all three trading sessions, driven specifically by interest in AIRTELAFRI (+6.3%), MTNN (+3.0%), and GTCO (+11.3%) stocks. Thus, the benchmark index closed higher by 2.9% w/w, with the MTD and YTD gains jumping to 9.3% and 18.9%, respectively. However, following the shorter trading week, activity levels were weaker than in the prior week, with volume and value traded declining by 31.6% w/w and 1.5% w/w, respectively. Performance across sectors was broadly positive, as all our coverage indices – Banking (+7.8%), Oil and Gas (+4.6%), Insurance (+1.9%), Consumer Goods (+1.1%), and Industrial Goods (+0.6%) indices – closed in the green.

We expect investors to trade cautiously in the week ahead as they anticipate the H1-23 earnings season. Notwithstanding, we reiterate the need for taking positions in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate continued its downward trend this week, declining by 140bps to 2.0% as inflow from the May FAAC allocation (NGN484.27 billion) supported the already buoyant system liquidity. We highlight that this week’s average system liquidity settled at a net long position of NGN874.39 billion (vs NGN755.96 billion in the prior week).

Next week, we expect the OVN rate to remain depressed, supported by possible CRR refunds into the banking system amid an anticipated inflow from OMO maturities (NGN5.00 billion).

Treasury bills

Just as we envisaged, proceedings in the Nigerian Treasury bills secondary market turned bullish this week, as the healthy liquidity in the system triggered demand for bills across the spectrum. As a result, the average yield contracted by 11bps to 6.4%. At this week’s NTB auction, the CBN offered bills worth NGN187.11 billion – NGN1.75 billion of the 91-day, NGN17.16 billion of the 182-day, and NGN168.21 billion of the 364-day – to market participants. Demand was higher, especially for the 364-day T-bills, as the total subscription settled at NGN753.47 billion (vs NGN286.13 billion in the previous auction). Eventually, the CBN allotted precisely what was offered at respective stop rates of 2.87% (previously 4.89%), 4.37% (previously 5.12%), and 6.23% (previously 8.24%).

In the coming week, we expect yields in the NTB secondary market to remain at current levels, given our expectation of buoyant system liquidity.

Bonds

This week, the Treasury bonds secondary market closed on a bullish note, as investors continued to cherry-pick attractive bonds supported by the high system liquidity. Consequently, the average yield across all instruments contracted by 80bps to 13.0%. Across the benchmark curve, the average yield dipped at the short (-83bps), mid (-122bps) and long (-43bps) segments, following bargain hunting in the MAR-2025 (-161bps), NOV-2028 (-148bps) and JUN-2053 (-97bps) bonds, respectively.

We retain our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Global Economy

According to the United States Department of Labor, the initial jobless claims in the US declined by 26,000 (or 9.8%) w/w to 239,000 in the week ending 24 June (vs the week ending 17 June: 265,000). We understand that the 26,000 decrease is the sharpest since October 2021, easing the recent concerns of a loosening labour market. Thus, this data reflects that the labour market remains relatively resilient, with job growth driven by the services sector, including hospitality and leisure. On a 4-week moving average, initial jobless claims increased by 1,500 to 257,550 (vs the week ending 17 June: 256,050). The current job data reinforces the view that the US Fed could increase the key policy rate further in July, as there seem to be limited signs of a substantial deterioration in the demand for workers. Thus, the monetary policy path could remain on an upward trajectory in the near term until the US Fed sees a material rebalancing in demand and supply. Indeed, the CME FedWatch Tool currently indicates an 86.8% probability of a 25bps hike when the Fed meets on 26 July.

According to the Chinese National Bureau of Statistics (NBS), China’s factory activity, as measured by the Manufacturing PMI, remained below the 50-point psychological threshold for the third consecutive month, settling at 49.0 points in June (May: 48.8 points). We highlight that the slowdown reflects further declines across export sales (46.4 points vs May: 47.2 points), new orders (48.6 points vs May: 48.3 points), and buying activity (48.9 points vs May: 49.0 points). Elsewhere, the Non-Manufacturing PMI eased further to 53.2 points in June (May: 54.5 points) in line with the weak new orders, subdued external demand, and lower employment levels in the review period. Overall, the Composite PMI slowed for the third consecutive month to 52.3 points in June (May: 52.9 points) – its lowest level since December 2022 (52.2 points) – reinforcing the growing concerns that China’s post-COVID recovery is losing steam. Looking ahead, we expect overall private sector activity to remain pressured by the faltering external demand, soft consumer spending, and lingering real estate wobbles. Accordingly, the government will likely do more with its policy measures to support overall growth in the near term.

Global Markets

Global stocks are set to close higher this week as positive economic readings calmed investors’ fears about a looming recession prompted by aggressive interest rate hikes. Accordingly, US equities (DJIA: +1.2%; S&P 500: +1.1%) rebounded from last week’s rout after the Federal Reserve’s annual stress test showed that the big banks have enough capital to weather a severe economic drop. Sentiments were further supported by upbeat GDP data, which defied recession woes. In the same vein, European equities (STOXX Europe: +0.1%; FTSE 100: +0.6%) were set to close higher, as lower-than-expected eurozone inflation data spurred hopes of less aggressive rate hikes from the European Central Bank (ECB). Likewise, Asian markets posted positive performances as the Nikkei 225 (+1.2%) and SSE (+0.1%) advanced, mirroring the positive sentiments on Wall Street. Elsewhere, the Emerging (MSCI EM: -0.5%) market index declined due to losses in Taiwan (-1.7%), while the Frontier (MSCI FM: +0.8%) market index posted gains following bullish sentiments in Morrocco (+0.4%).

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