Naira Plunges Across Forex Segments Amid Liquidity

The naira closed last week on a losing streak, plunging in all segments of the foreign exchange (forex) market. “In the local currency market, the performance of the naira was underwhelming”, said analysts at Afrinvest. At the parallel market, the base currency (Dollar) appreciated 1.8 per cent week-on-week (w/w) against the price currency (naira) to N1,150.00/$. While at the NAFEM window, the base currency (dollar) rose 0.4 per vent w/w against the naira) to N794.89/$. Meanwhile, activity level in the NAFEM window improved by 11.1 per cent w/w to $817.7 billion from $736.3 billion in the prior week. At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts of the Naira remained at $4.2 billion. “We do not foresee any changes given that CBN has cleared all Non-Deliverable Forwards (NDFs) open contracts, shortly after rendering contracts for tenors between one and twelve months inactive in response to reforms in the NAFEM window. This week, we expect rates across different segments of the market to depreciate following demand-supply imbalance”, said Afrinvest. At the end of trading last week, system liquidity surged higher by 667.2 per cent to close at N527.1 billion. Nonetheless, the price of liquidity in the banking system, the OPR and OVN rates rose 2.9ppts and 2.4ppts w/w respectively to 23.8 per cent and 24.6 per cent. At the primary market segment for T-bills, the CBN offered bills worth N211.7 billion across the 91 (N9.7 billion), 182 (N1.8 billion), and 364-day (N199.9 billion) tenors. Demand was healthy across all ends of the curve as the average bid-to-cover ratio printed at 5.8x due to robust system liquidity. Stop rates across the 91-day and 182- day instrument improved, rising 100bps apiece to 7.0 per cent (91-day) and 11.0 per cent (182-day). Meanwhile, the stop rate remained unchanged at 16.8 per cent in the 364-day instrument. Meanwhile, the secondary market segment saw a bullish outing as the average yield across all tenors compressed 213 basis points (bps) w/w to 11.2 per cent. The bullish outing was driven by buy interest on the mid (182-day) and long-dated (365-day) instruments as yield saw a decline of 242bps and 221bps w/w respectively. In the coming week, we anticipate healthy liquidity conditions due to FAAC inflow and Bond coupon payment. Consequently, we expect buy sentiment to be sustained at the T-bills secondary market. Meanwhile, Brent crude oil price futures inched higher by 1.4 per cent to close at $81.75/bbl., as traders remained on the sideline ahead of next week’s Organisation of Petroleum Exporting Countries (OPEC+) meeting. The anticipated meeting would focus on output cut agreements for 2024, following the recent downturn in oil price due to strong supply from non-OPEC producers. Meanwhile, on the domestic front, Nigeria’s foreign reserves fell 28bps ($91.7m) w/w to $33.2bn (22/11/2023).

Analysts Forecast Increased Pressures On Economy As Naira Depreciates By 23%

With the naira losing 23 per cent value in the third quarter of 2023, plummeting from N770/$1 at the end of the second quarter to over N1000/$1 by the end of the third quarter at the parallel market, analysts expect further pressure on the currency in the fourth quarter of 2023. Meanwhile, the official exchange rate at the end of the third quarter was N755.27/$1, a noticeable drop from N769.25/$1 at the end of the second quarter. The widening gap between the official and unofficial rates reflects the persistent scarcity of foreign exchange in the country, as well as the divergent policies of the CBN and the market forces. The Central Bank of Nigeria (CBN) has blamed the forex backlog estimated at between $6 billion to $10 billion as the major reason for the currency depreciation. At the recent Senate confirmation of the CBN governor, Yemi Cardoso stated that he intends to establish the exact unsettled obligations and find ways to “take care of it” confirming that progress will not be made without clearing the backlog. He said it would be naive to think that the CBN will be able to make progress if it don’t handle that side of the foreign exchange. “But definitely, the immediate priority will be to verify the authenticity and extent of the unsettled obligation and once we do that, we need to look for a way to take care of it. The naira’s weakness has had negative impacts on the Nigerian economy, as it has increased the cost of imports, fuelled inflation, eroding purchasing power, and discouraged investment. According to the Head of Macro Strategy at FIM Partners UK Ltd, Charlie Robertson, the CBN may have to devalue the official rate again to align it with the market reality and conserve its dwindling external reserves, which fell from $34.1 billion at the end of June to $33.2 billion at the end of September. He noted that further devaluation might be avoided if the apex bank is able to meet its obligations to clear forex backlogs, adding that achieving this might require the government tap new loans from friendly countries. Stears Africa FX Monitor, a data and intelligence company, also has predicted a continued naira volatility. The company highlighted fiscal policies, external trade, and global market trends, including inflation rates, interest rates, policy events, and geopolitical factors as key factors affecting the naira’s performance. Fadekemi Abiru, Head of Insights at Stears, expressed concerns about the naira volatility. “The continued unpredictability of the naira underscores the importance of timely and informed decision-making for businesses and investors in Nigeria,” she said. The CBN had removed trading restrictions on the official market in June which drove the naira to a record low of N750 to the Dollar on the official market, down from the previous N477 to the dollar it traded for. This was the first time since 2016 that the naira had recorded a big fall on the official market before the CBN introduced a managed exchange rate in 2017.

Naira Devaluation: Dangote, 8 others take N113.63bn hit

Dangote Cement led eight other companies on the NGX in foreign exchange losses recording a significant foreign exchange loss of N113.63 billion, representing a 179.47 per cent year-on-year increase, the highest in the past five years as a result of the devaluation of the Naira. The Naira went from N465/$ at the end of May 2023 to N756/$ in June 2023, resulting in a net exchange loss of N116.1 billion on third-party loans and payables within the Nigerian entities. While some companies experienced significant declines in some performance indicators, others performed relatively better. A review of the financial performance of Berger Paints, Beta Glass, BUA Cement, CAP, Dangote Cement, MEYER, Notore, and WAPC, reveals that among these companies, Dangote Cement, Notore, and BUA Cement, reported a combined foreign exchange losses of -N129.811 billion, while Beta Glass, CAP, and WAPCO reported an aggregate foreign exchange gain of N3.49 billion. However, when considering the cumulative impact of foreign exchange fluctuations, it led to an overall reduction of 8.19 per cent in their total pre-tax profit, which amounted to N372.573 billion in the first half of 2023 Dangote Cement led in foreign exchange losses recording a significant foreign exchange loss of N113.63 billion, representing a 179.47 per cent year-on-year increase, the highest in the past five years. According to the first half of 2023 financial notes, the net exchange loss on foreign-denominated transactions was primarily attributed to the sharp devaluation of the Nigerian Naira in June 2023. These losses had a direct effect on the decline in pre-tax profit, which decreased from N264.89 billion to N239.86 billion during the reviewed period. Notore also reported a substantial foreign exchange loss of N14.05 billion in the first half of 2023. Coupled with low revenue and a significant increase in finance costs, this contributed to a pre-tax loss of N38 billion, representing a 1,558 per cent decline. The company managed to generate revenue of N7.92 billion, a substantial decline of 68.97 per cent for the first half of 2023. BUA Cement reported a foreign exchange loss of N2.137 billion in the first half 2023, marking a significant year-on-year increase of about 103 per cent. Coupled with elevated interest expenses, this dampened pre-tax profit, resulting in only a marginal increase of 2.75 per cent to N76.425 billion when compared to the first half of 2022. WAPCO – Lafarge led the foreign exchange gainers, recording a N2.237 billion gain in foreign exchange. This contributed to a growth of 18 per cent in pre-tax profit. However, despite this positive performance, the company experienced a year-on-year decline of 5.16 per cent in profit after tax, primarily due to high-income tax expenses.