Analysts got it wrong on Nigeria FX call


Months to the February 2019 general elections in Nigeria, analysts largely forecast a slowdown in foreign portfolio inflows that would see the local currency – naira – take a beating against the dollar.

Inflows did slow leading up to the elections but it’s the rate at which those outflows reversed since the conclusion of the elections that caught analysts by surprise.

It would have been difficult for any analyst to predict otherwise given the underlying context at the time. The US Federal Reserve said it planned three rate hikes in 2019, there were concerns about a trade war between the US and China, and the dollar was getting stronger.

Emerging market assets were haemorrhaging foreign cash and Nigeria was entering into an election that was expected to be keenly contested and largely unpredictable – just the recipe for foreign investors to take flight to safety.

The most dovish forecast was for the naira to weaken to N390 per US dollar while the most bullish forecast was closer to N500, as foreign inflows dried up leaving the CBN in a pole position as the net supplier of FX.

But it never happened on the scale many projected, following a somewhat successful general election that saw President Muhammadu Buhari secure a second term. The US Fed Reserve, concerned about global growth, has also dumped plans for monetary tightening and emerging markets have turned the corner on a nightmare late 2018. Oil prices have also put in a stronger-than-expected performance this year, surging 33.6 percent year to date to cross $70 per barrel to a 24-month high.

Foreign money has gushed into Nigeria since the conclusion of the elections and the US Fed changed its initial hawkish stance, with portfolio inflows reaching a record of $4.7 billion in March alone, the highest monthly inflow on record. Most of that cash found its way into the bond market.

“After the elections, fund managers that were underweight Nigeria made the switch to neutral,” a fund manager who sits in South Africa told BusinessDay.

“The bond market surge came off the back of attractive carry trade, driving average bond yields to 13 percent post-election from 16 percent,” the fund manager who was not authorised to speak on behalf of his company said.

The record inflows were reflected in the transaction levels at the Investors and Exporters window. The I & E window’s impressive showing defied projections, given that many had expected that because of the uncertainty around the general elections, that volume will dip, with some forecasting a challenging period for the local currency.

Total trades on the Importers & Exporters Foreign Exchange window surged to near $25 billion for the first four months of this year, according to data provided to BusinessDay by the FMDQ OTC, as the activity in March proved strong enough to lift total activity to new levels.

The figure of $24.46 billion is 28 percent more than the level for the corresponding period of last year ($19.03 billion) and analysts say the I&E FX window has truly become a significant tool for Nigeria’s effort at a market-driven exchange rate management regime.

“Earlier expectations at the beginning of the year for a slowdown due to political uncertainty didn’t materialise, thanks to a somewhat successful election, a dovish US Fed and the strong rally in oil prices,” said Omotola Abimbola, an analyst at investment bank, Chapel Hill Denham.
“The transactions were dominated by post-election portfolio inflows into the bond market,” added Abimbola.

Whether the trend is sustained into the remainder of the year will depend on the movement in oil prices and if global central banks remain dovish.

FMDQ data showed that for the week ending April 26, 2019, a total of $1.61bn was traded on the market, a jump of 33 percent over the $1.21bn traded the previous week.
The figure is also more than the total trade of $1.31 billion recorded in the same week of last year.

External reserves are up by 0.8 percent MTD to US$44.8bn (7.3 months of goods and services import cover) as the CBN remained a net-buyer of FX in the I & E Window while stable oil prices also supported organic FX inflow from oil exports.

The naira closed at N360.95 per dollar at the I & E window Monday. The naira has strengthened 0.8 percent year to date.

Most investment banks are recommending that investors stay unhedged on naira assets in the short term on the basis of both the willingness and capacity of the CBN to continue to defend its FX pegs.