Arnold Dublin Green, Chief Investment Officer of Cordros Capital, has attributed the recent depreciation of the naira to the exit of foreign portfolio investors (FPIs) from Nigeria’s financial markets.
Speaking on the Drinks and Mics podcast hosted by Ugo Obi-Chukwu, CEO of Nairametrics, on Friday, Green explained that Nigeria’s dependence on foreign portfolio inflows has made the currency vulnerable to external shocks.
Watch full analysis here:
He noted “Our heavy reliance on foreign portfolio influence is coming to play because we’ve opened up our market to a volatile global environment. Yes, we are in a weaker dollar situation which is always the risk to the trade … but it is what it is. The naira is getting priced with oil, the naira is getting priced with everything around the world,” Green said.
He noted that foreign investors were initially attracted by high yields in Nigeria’s fixed-income market, particularly when Open Market Operations (OMO) bills and Treasury bills offered returns as high as 30% and 29%, respectively. However, as yields have declined and the naira has appreciated against the dollar, investors have begun exiting the market to secure their profits.
“This FPI has made the money… Money came in when OMO was at 30% yield for one year, one-year T-bills at 29%. The naira was at 1700/1600. We wanted to court these investors, and they came in. Now they realize that T-bills that were at 29% yield are now under 20%. Your OMO that was 30% yield is now under 20%. Your currency that was at N1700 is now strengthened to 1500 very quickly. You’ve made your money, and I don’t need to be here anymore,” he added.
FG’s payment to contractors puts pressure on the Naira
Ugo Obi-Chukwu, CEO of Nairametrics, highlighted that Bureau De Change (BDC) operators reported significant financial transactions during the week, attributing them to federal government disbursements.
“BDC operators told us there were a lot of payments that happened during the week – FG payments to contractors,” Obi-Chukwu stated.
He explained that such large-scale transactions often impact liquidity levels in the foreign exchange market, influencing the exchange rate dynamics. The influx of naira into the system can lead to increased demand for dollars, putting pressure on the currency.
In an earlier edition of the programme, Samson Esemuede, CEO at Zrosk, had emphasized that stabilizing the exchange rate should be a higher priority for policymakers than adjusting interest rates.
“Interest rate is a form of price. Exchange rate is a form of price. Now, as a policymaker, you have a choice as to which price you want to adjust or focus on. Within the context of Nigeria and the impact of what it means for the people who are creating output, FX is so much more important than interest rate,” Esemuede stated.
More insights
The naira weakened further on Friday, falling to a new low of N1,590 per dollar in the parallel market.
In the official foreign exchange market, also known as the Nigerian Foreign Exchange Market (NFEM), the naira depreciated by 0.6% (N9.13) on Thursday.
Data from the Central Bank of Nigeria (CBN) showed that the dollar was quoted at N1,547.81/$1, compared to its previous close of N1,538.68/$1.
