Forex inflows hit $4.05bn amid rising confidence in Nigeria’s economy

Total inflows into Nigeria’s foreign exchange (forex) market surged to $4.05 billion in November, reflecting growing confidence in the country’s macroeconomic outlook.

This marks a significant increase of over $1 billion from the $3.04 billion recorded in October, according to the latest report from the Nigerian Autonomous Foreign Exchange Market (NAFEM).

The rise in inflows, the highest in nearly five years, was driven by strong contributions from both domestic and foreign sources, bolstering market liquidity and stability.

Foreign inflows surged by 26% from $1.36 billion in October to $1.71 billion in November, fueled by a 39.9% increase in investments from foreign portfolio investors and a 43.9% rise in inflows from international companies.

Domestic inflows also saw substantial growth, rising 38.5% from $1.69 billion to $2.34 billion. This was largely supported by a 27% increase in contributions from the Central Bank of Nigeria (CBN) and a 56% rise from non-bank corporates.

However, inflows from individuals and exporters declined sharply, falling by 88.5% and 63.5%, respectively.

The naira showed strong performance last week, appreciating by 7.3% to close at N1,558.65 per dollar.

This rally followed the CBN’s launch of the Electronic Foreign Exchange Matching System (EFEMS), aimed at improving transparency in forex transactions.

Nigeria’s forex reserves also increased by $68.65 million, reaching $40.30 billion.

The group said: “We attribute the sturdy performance in foreign portfolio investment (FPI) inflows to improved investor confidence and increased FPI participation in the Nigerian capital market as naira yields remain attractive.

“Barring any shock, we anticipate forex inflows to remain robust in the short term, supported by improved market confidence, following the implementation of the Electronic Foreign Exchange Market System (EFEMS),” Cordros Capital stated in a weekend note.

Other analysts said they expected the efficiency from EFEMS and attractive yields on Nigerian assets to continue to support inflows from foreign investors.

At Afrinvest West Africa, some analysts said they expected the naira to remain on the upswing, citing improved market confidence following the successful launch of the EFEMS.

“We anticipate the Naira to regain more ground against the dollar this week, driven by aforementioned factors,” Afrinvest stated.

Last week, Nigeria’s $2.2 billion Eurobond recorded a 300 per cent oversubscription with investors staking $9 billion on the country’s first Eurobond in more than two years.

Nigeria offered two tenors of a six and half years and 10 years Eurobonds, with both medium-tenor and long-tenor bonds oversubscribed.

The strong international demand has allowed Nigeria to tighten its coupon rates with the guidance rates for the 6.5 years and 10 years bonds at 9.625 per cent and 10.375 per cent respectively, a substantial discount to initial guidance.

The latest report on FPIs also shows that foreign portfolio investors were showing stronger appetite for Nigerian assets with more than two out of every three transactions by foreign investors at the Nigerian stock market on the investment side.

Official trading report indicated that that foreign portfolio inflows nearly tripled in the past month, leaving Nigeria with foreign portfolio investment (FPI)’s surplus of N19.16 billion, the highest monthly upside this year.

Foreign portfolio inflows, which denote the buy side, rose by 195.83 per cent to N33.31 billion in October, a remarkable rebound from this year’s low of N11.26 billion in September 2024. This represented a surplus of N19.16 billion.

On the other hand, foreign portfolio outflows, the sell side of the transactions, dropped to its lowest this year at N14.15 billion, 53.07 per cent lower than N30.15 billion recorded in September.

The recovery in FPI inflows and increased domestic demand boosted total transactions at the Nigerian Exchange (NGX) in October 2024 to N502.73 billion, the highest in seven months.

Total transactions stood at N493.01 billion in the previous month. Domestic transactions increased from N451.60 billion in September to N455.27 billion last month.

With the upswing in the immediate past month, total transactions at the NGX hit a 10-month record of N4.47 trillion, 52.6 per cent above N2.93 trillion recorded in the corresponding period of 2023.

The FPI transactions for the 10-month period stood at N744.34 billion, 155.5 per cent above the N291.38 billion recorded in comparable period of last year.

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The FPI inflows for the 10-month period stood at N344.30 billion as against N122.55 billion in 2023 while outflows stood at N400.04 billion compared with N168.83 billion.

Meanwhile, the proportion of foreign participation in the Nigerian market increased from 9.93 per cent last year to 16.65 per cent this year.

Domestic transactions totaled N3.73 trillion within the 10-month period, 41.07 per cent above the N2.64 trillion recorded in the comparable period of 2023.

The FPI report, coordinated by the NGX, included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of foreign portfolio trend.

The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the equities market and the economy.

“While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation.

The October performance set a new record above the market’s third quarter performance. Total transactions at the stock market had risen to N3.97 trillion in the first nine months of this year, the highest third quarter turnover according to available official records of the market.

The third quarter 2024 performance represented a new record against the market’s turnover in third quarter 2023, when the market had set a high of N2.71 trillion. The closest records were in 2018 and 2014 when the market recorded N2.01 trillion and N2.04 trillion respectively.

Experts attributed the upbeat at the stock market to the increasing attractiveness of the Nigerian market to foreign investors, ongoing economic reforms, resilient earnings by Nigerian companies, exchange rate differential, ongoing banking recapitalisation and the reform in the oil sector.

Managing Director, AIICO Capital, Dr. Femi Ademola, said Nigerian equities have become very attractive to both foreign and domestic investors.

Ademola, a Chartered Financial Analyst (CFA), said: “The equities market has become very attractive, mostly due to the devaluation of the currency which makes the shares very cheap, especially to foreign investors.

“The very strong half-year performance reported by corporates especially banks and the corporate actions that followed the announcements have also driven many investors to the equities market.

“Finally, the lack of volatilities in the bond market makes it unattractive to investors, thus they flock to the equities market.”

Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said the ongoing banking recapitalisation and the reforms in the oil sector have driven more investors to the market.

Amolegbe said: “We’ve seen increasing return of foreign portfolio investors, I understand the turnover by FPIs has grown significantly in the last few months. This can be attributed to the weaker naira that makes Nigerian stocks a bargain for FPIs.

“Secondly, new listings such as Aradel also boosted investors’ appetite for stocks. This can also be seen in the light of the approval of the Exxon Mobil’s acquisition by Seplat by the Federal Government.

“Thirdly, the banking recapitalisation along with impressive second quarter reports have continued to attract investments towards that sector,” Amolegbe, a former President of Chartered Institute of Stockbrokers (CIS), said.

Managing Director, HighCap Securities, Mr. David Adonri, said the banking sector has contributed substantially to the growing turnover at the stock market.

“The recapitalisation of banks is orchestrating demand for their shares even in the secondary market. Highly capitalised stocks in the petroleum sector have also been upbeat. Finally, investors have also reacted positively to the big interim dividends declared by banks,” Adonri said.

A report by Afrinvest West Africa had indicated that FPIs in the Nigerian market could reach N1.1 trillion by the end of 2024 as foreign investors continued to increase their stakes on Nigerian securities.

Analysts at Afrinvest West Africa stated that at the current run rate, the size of foreign participation at the stock market should reach N1.1 trillion by year-end, translating to a 267.8 per cent increase on 2023.

The firm estimated that total FPIs, including equities, money, and bond markets, could swell fourfold to $5.2 billion in 2024 in a base case scenario.

Analysts noted that even when adjusted at exchange rate of N1,510.10 /$, the prevailing rate should deliver about $728.4 million participation size on the NGX, representing a 60.9 per cent increase over the 2023 actual that was converted at an exchange rate of N907.10 per dollar.

“This marked improvement underscores the gradual return of foreign portfolio investors to Nigeria – a development we believe is largely connected to the ongoing reforms by the CBN,” Afrinvest stated.

The report highlighted a strong and positive correlation between FPI inflow data reported by the NBS in dollars and foreign investor participation statistics reported by the NGX in naira.

Afrinvest noted that the correlation was not a surprise given that equity is one of the three investment portfolio areas into which FPIs are deployed.

The report pointed out that although FPIs are less reliable in building sustainable foreign exchange (forex) buffers due to their characteristic nature of flight to safety, the recent dynamics if sustained hold positive for stabilising the exchange rate in the short to medium term.

Analysts noted that the relaxation of capital controls, which led to payment of forex backlogs, and financial repression tactics adopted under the last CBN regime supported the improved sentiment.

“Overall, we posit that sustaining the improvement in FPI could help support a near term easing in price and exchange rate pressures,” Afrinvest stated.