Over the last few months, the Naira has been relatively stable at the I&E window, supported by elevated crude oil prices, while the parallel market rate remains pressured due to elevated demand.
Based on the data from FMDQ, the total FPI inflow for May was US$124.3 million, which remains significantly lower than the pre-pandemic level of c. US$1.5 billion monthly. Furthermore, FPI funds which historically contributed about US$13.4 billion on average to the total FX reserve now accounts for about c. US$5.1 billion. This weakened inflow, therefore, explains the low liquidity at the I&E window, which has averaged US$ 78.1 million in 2021 when compared with the pre-covid level (first 3 months of 2020) of US$1.7 billion.
Furthermore, the elevated crude oil price at US$ 71.6/bbl has not translated to an increase in external reserves, which is currently down by 3.2% ytd. In our view, while we acknowledge that weakened FPI inflows could have contributed to this, we strongly believe foreign repatriation has intensified over the last few months.
To validate this claim, we observed that across the spot and forward markets, the CBN remains a net seller, as net flows have been negative since the start of the year. As such, the total CBN’s intervention since the start of the year averaged c.US$841.6m per month. This must have reduced FX backlogs significantly albeit no official backlog estimates from the apex bank had been provided.
In our view, as global risk aversion eases, foreign investors’ interest in risky assets in emerging economies should improve.
However, despite the strong carry trade that exists, foreign inflows are likely to remain tepid, save for clarity on FX policy and repatriation mechanism. Overall, we forecast the CBN will likely devalue the Naira by c.5-7% by year-end to unlock FX liquidity and curb the external imbalances, which is projected at US$10.80 billion (2.1% of the GDP) for 2021.