A Business Day report estimates the backlog in FX demand at c.US$7bn. According to the report, the estimate of US$7bn was arrived at by bankers who say manufacturers have unmet dollar demand of US$2bn while foreign equity investors and foreign holders of the CBN’s OMO bills account for roughly US$5bn combined. Foreign equity investors alone are estimated to have a backlog of c.US$2bn. With yields on OMO bills at historic lows, many investors who wish to exit are forced to roll over in the face of dollar scarcity. Total foreign holdings in OMO securities is estimated at c.US$10bn according to media reports.
The steep dip in oil prices caused by the COVID-19 pandemic has meant a shortage of FX for the Nigerian government. Though we are beginning to show a recovery, there has not been a significant reduction in the backlog of unmet demand. The CBN mid last month noted that the country’s available foreign exchange will be devoted to strategic imports or to service obligations that are a priority. Foreign investors looking to repatriate their funds were assured of the safety of their funds but were asked to remain patient.
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The possibility of further devaluation and weak economic outlook has also stalled foreign portfolio inflows, a major source of dollars into the economy. Reports also say remittances from official sources, which is also a significant source of FX has slowed, given the conversion rate of N374/US$ compared with the parallel market rate of about N450/US$.
Liquidity remains tight in the FX market with the average monthly turnover in the I&E market significantly down to US$41.5m in May from US$297.5m in January. Yields on OMO bills also remain at historic lows. Persisting low yields, weak economic outlook, and expectations of devaluation will continue to deter foreign interest in the Nigerian market in our view. We therefore, anticipate significant sell-offs in the equities and money market as soon as the CBN is able to meet foreign investor demand for dollars. That said, we expect the significant sell-offs to push OMO yields higher, which may result in some inflows considering ultra-low yields in advanced economies.
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NIGERIA.
