The recent increase in Nigeria’s foreign exchange reserves, rising from a little above $36 billion in September 2024 to over $39 billion in October 2024, has several important implications for the broader economy, the fixed income markets, and the country’s ability to attract foreign portfolio investments. Unarguably, a growing level of foreign exchange reserves is generally seen as a positive indicator of economic stability and health.
In a different development, the IMF has projected a 3.2% growth for Nigeria’s economy in 2025, coupled with a forecasted drop in inflation to 25%. This demonstrates a significant economic outlook for the country and its citizens.
With a deficit in liquidity almost throughout the week, the system observed a bit of ease on Friday with excess liquidity of over N180 billion. At the NAFEM Window, the exchange rate traded at a high of $/N1,696.00 on Thursday, and at a low of $/N1,581.16 on Wednesday. The market closed the week at $/N1,600.00 on Friday.
The notable increase in Nigeria’s foreign exchange reserves provides a buffer against external shocks as it enhances the country’s capacity to manage its currency and can equally contribute to greater confidence among both local and international investors. A robust reserve position is likely to strengthen the Naira, thereby possibly reducing volatility in the currency market, which is essential for maintaining investor confidence.
In the fixed income markets, investors may sometimes perceive stronger reserves as a sign of reduced default risk, which can result in increased demand for government securities.
Moreover, the rise in foreign exchange reserves significantly strengthens Nigeria’s attractiveness to Foreign Portfolio Investors (FPIs). With a stable and growing reserve position, Nigeria presents a more appealing environment for FPIs seeking returns in emerging markets, and in this case, the Nigerian financial markets.
Going by the DMO’s reduction in offer for the month of October, one would think and believe that the DMO was trying to cut down on borrowing. In previous times, offers ranged from N100 billion to 150 billion. Last month, we saw a range of offers from N30 billion to N70 billion. However, out of a total offer of N180 billion for the month of October, at the end of the auction, the DMO aggressively borrowed a total of N289.597 billion.
At the end of the previous auction, the stop rate for the April 2029 bond was 19.00% while the February 2031 closed at 19.99%. However, at the just concluded auction, both securities recorded a rate difference of 175 basis points hike, to close at 20.75% and 21.74%, respectively.
BONDS TENOR | APRIL 2029 | FEBRUARY 2031 |
AUCTION DATE | 21-10-2024 | 21-10-2024 |
SETTLEMENT DATE | 23-10-2024 | 23-10-2024 |
MATURITY DATE | 17-04-2029 | 21-02-2031 |
TENORS | 5-YEAR | 7-YEAR |
AMOUNT OFFERED (₦) | 90 BILLION | 90 BILLION |
SUBSCRIPTION (₦) | 60.737 BILLION | 328.584 BILLION |
AMOUNT ALLOTTED (₦) | 57.237 BILLION | 232.360 BILLION |
STOP RATES (%) | 20.7500 | 21.7400 |
PREVIOUS STOP RATES (%) | 19.0000 | 19.9900 |
Last Wednesday, the Central Bank of Nigeria (CBN) sold over N370 billion worth of T- Bills at the auction. When compared to the auction from two (2) weeks ago, that is over 400% of what was sold. The amount sold for the 91-day tenor was equal to the amount on offer. However, the total volume sold for the 182-day tenor was about N2.6 billion short of the amount on offer. Conversely, the 364-day was the only tenor that recorded an excess allotment—exactly equal to the N2.635 billion deducted from the mid-tenor. Overall, the amount sold was exactly equal to the amount on offer.
For the third consecutive time, the 91-day and 182-day tenors maintained their stop rates at 17.0000% and 17.5000%, respectively. However, the 364-day tenor saw a rise of approximately 79 basis points—from 19.8640% to 20.6500%.
AUCTION DATE | 23-10-2024 | 23-10-2024 | 23-10-2024 |
ALLOTMENT DATE | 24-10-2024 | 24-10-2024 | 24-10-2024 |
MATURITY DATE | 23-01-2025 | 24-04-2025 | 23-10-2025 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 13,141,376,000 | 11,991,143,000 | 349,537,405,000 |
SUBSCRIPTION (₦) | 16,851,318,000 | 12,583,651,000 | 460,403,920,000 |
ALLOTMENT (₦) | 13,141,376,000 | 9,356,002,000 | 352,172,546,000 |
STOP RATES (%) | 17.0000 | 17.5000 | 20.6500 |
PREVIOUS STOP RATES (%) | 17.0000 | 17.5000 | 19.8640 |
The International Monetary Fund’s (IMF) forecast of economic growth in Nigeria signals a positive recovery trajectory, which can significantly benefit the financial markets. As the economy rebounds from recent challenges, we can expect reactions and opportunities within the financial landscape.
Typically, a growing economy leads to job creation and higher income levels, enhancing the standard of living for many citizens. With a more vibrant economy, the environment for entrepreneurship is likely to flourish. Financial institutions may respond by developing innovative funding solutions and investment products tailored for startups, further reviving the markets.
Although inflation remains high at 25%—the IMF’s forecast for 2025—signs of stabilisation or reduction could boost purchasing power over time. As prices stabilise, consumers may experience relief in their daily expenses, bringing about a sense of economic confidence.
Moreover, the combination of economic growth and reduced inflation can create a more good-looking environment for foreign direct investments. In saner climes, international investors are drawn to stable economies with predictable indicators. An influx of FDI can lead to enhanced infrastructure and technology, contributing to overall economic resilience. Financial markets may react positively, as the expectation of increased investment often correlates with higher stock valuations and strengthened local currencies.
In other news, in an interaction with journalists at the World Bank and IMF summit in Washington D.C., to address the concerns raised by the Governor of the CBN regarding the impact of FAAC disbursements on the depreciation of the Naira, the Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, emphasised that the fundamental issue plaguing Nigeria’s foreign exchange market is supply-related.
The Minister stressed the importance of addressing structural issues within the economy, particularly in relation to the oil sector, which remains a foundation of Nigeria’s revenue generation. By focusing on enhancing oil production, the government could create a more robust foreign exchange framework, ultimately leading to greater economic stability.
Recently, the World Bank highlighted a series of critical policy inaccuracies executed by fiscal and monetary authorities in Nigeria between 2015 and 2023 that have significantly contributed to the country’s rising inflation figures. In the years preceding 2015, Nigeria enjoyed a relatively stable economic environment, characterised by a single-digit inflation rate comparable to that of other emerging economies. However, a series of macroeconomic decisions have derailed this stability, leading to escalating inflationary pressures.
Among these inaccuracies, the Ways and Means financing of fiscal deficits by the Central Bank of Nigeria stands out as a particularly disadvantageous practice. This approach has effectively allowed the government to run deficits without corresponding revenue generation, thereby increasing the money supply and fuelling inflation. Additionally, the provision of large credits at subsidised rates to households and businesses has inadvertently distorted market dynamics, giving rise to inefficiencies and further inflationary pressures.
Furthermore, the decision to ban access to foreign exchange for the importation of products has also played a significant role in exacerbating inflation. This policy has restricted the availability of essential goods, driving up prices and creating shortages in the market. Likewise, the cost of maintaining an overvalued exchange rate has added another layer of complexity, as it has encouraged unsustainable import practices while disincentivising local production.
Lastly, the prevalence of unbudgeted fiscal deficits has undermined fiscal discipline and eroded investor confidence, further destabilising the economic environment. Collectively, these missteps prove how misaligned fiscal and monetary policies can lead to adverse outcomes, significantly impacting economic status and contributing to an inflationary environment that weakens the purchasing power of its citizens.
Riding on the stance of the Minister of Finance, as an oil-producing nation, Nigeria has the potential to significantly augment its foreign exchange reserves by jacking up oil production output. This increase could serve to enhance the availability of foreign currency, thereby providing much-needed liquidity in the forex market. A more stable supply of foreign currency would not only help to stabilise the Naira, but could also mitigate the pressures of inflation and improve overall economic confidence.
Interest rates across Nigeria are expected to remain relatively elevated until inflation subsides. The November MPC meeting may tighten further to underscore this. We expect bullish sentiment across US equity and cryptocurrency markets in the build-up to the US elections. Oil prices, conversely, are likely to be depressed into the US elections as Israel appears to have adopted a calculated approach to retaliation against Iran.
