- CBN reform of FX market increases confidence of foreign investors – Experts
A review of investors’ activities in the Fixed Income and Currency market in the first half of 2024, showed a bullish performance as turnover stood at about N179.84 trillion with trading in foreign exchange accounting for 35.4 percent of total turnover while Treasury Bills came behind Forex transactions. BAMIDELE FAMOOFO reports.
The turnover recorded in the ‘FIC’ market on the platform of the FMDQ Exchange in the first six months of 2024, stood at N179.84 trillion, showing a robust participation of investors who are interested to make short term investment in the Nigerian financial markets.
The total funds committed into the market in the review period will finance the nation’s budget for 2024 of ‘Renewed Hope’ more than six point five times and the turnover is larger than the market capitalisation of all the equities listed on the Nigerian Exchange Limited, more than three times.
The Federal Government of Nigeria earlier proposed a budget of N27.5 trillion and estimated revenue of N18.32 trillion for the 2024 fiscal year.
The equities market recorded a total market capitalisation of N56.06 trillion at the end of half year 2024 compared to N40.92 trillion recorded as of December 31, 2023.
“Buoyed by President Bola Tinubu’s economic reform and a surge in yields, foreign investors have been loading up on Nigerian bonds and money market instruments in the first quarter of 2024, with total capital inflows tripling to $3.37billion compared to $1.13bn over the same period in 2023”
Meanwhile, investors were more bullish in dealings in the foreign exchange segment of the market with turnover standing at over N63.60 trillion, representing 35.4 percent of total turnover in the market in the review period.
Trading in Treasury Bills stood at over N20.24 trillion, representing 11.25 percent of total turnover on the FMDQ as of June 30, 2024.
Further breakdown of investment activities in the market in the period, showed that investors injected over N19.83 trillion or $15.2 million in Foreign Exchange Derivatives, which accounts for 11.02 percent of total turnover. OMO Bills accounted for 8.42 percent of market turnover with over N15.15 trillion splashed on the instrument while FGN Bonds attracted over N10.80 trillion from investors in six months. Repurchase Agreement/Buy-Backs attracted N46.47 trillion or $34.57 billion in six months.
Monetary tightening boosts investment
Money market rates have been up since Olayemi Cardoso took over the Central Bank of Nigeria as Governor.
Rates, according to financial analysts, have been driven up largely by the monetary tightening stance of the CBN. This has influenced robust investment activities in the money market as foreign portfolio investments rekindle interest in Nigeria.
The Monetary Policy Rate increased by 775 basis points from 18.5 percent to 26.25 percent between May 2023 and March 2024 to curb inflationary pressures.
The CBN liberalised the foreign exchange market in June 2023 to achieve price discovery.
Other actions and interventions to achieve foreign exchange stability include; clearance of FX backlogs, removal of restrictions on 43 banned items from accessing FX, BDC regulations, among others.
Total capital inflows in Nigeria tripled to $3.37bn in January-March compared to $1.13bn in the first quarter of 2023, according to the National Bureau of Statistics.
Buoyed by President Bola Tinubu’s economic reform and a surge in yields, foreign investors have been loading up on Nigerian bonds and money market instruments in the first quarter of 2024, with total capital inflows tripling to $3.37billion compared to $1.13bn over the same period in 2023, according to Nigeria’s National Bureau of Statistics.
Foreign portfolio investments, including equities, accounted for 61.48 percent of the total capital inflows. The money market saw the most growth in foreign investment, followed by bonds, and then equities.
According to Olusegun Zaccheaus, Partner and West Africa Lead Strategist, PWC, “The Nigeria 10-Year Government Bond Yield increased to 19.30% in May 2024 from 14.55% in May 2023. The increase in bond yields resulted from attractive rates on OMO and treasury bills, spurred by the rise in the MPR.
Month-on-Month performance review
In June 2024, the total secondary market turnover on FMDQ Exchange was N28.43trillion, representing a MoM decrease of 31.82 percent (N13.27) and a YoY increase of 30.77 percent (6.69trn) from May 2024 and June 2023 figures, respectively. Foreign Exchange (FX) and Money Market (MM) transactions dominated secondary market activity, jointly accounting for 72.83 percent of the total secondary market turnover in June 2024.
The DMO sold T.bills valued at N617.92billion across its auctions in June 2024, representing a 32.37 percent (N295.73bn) MoM decrease on the value of T-bills sold across its auctions in May 2024 (N913.64bn).
Similarly, the DMO sold FGN Bonds worth N297.01billion in June 2024. This represented a 56.46 percent (N385.06bn) MoM decrease on the amount sold in May 2024 (N682.07bn). The ratio of sovereign securities sold by the DMO relative to the amount offered1 across its auctions in June 2024 was 125.07 percent and 66.00 percent, for T.bills and FGN Bonds, respectively.
In June 2024, the CBN sold OMO Bills worth N1, 773.16billion in the primary market, representing a 229.40 percent MoM (N1, 234.87bn) increase on the amount sold in May 2024 (N538.29bn).
Non-sovereign securities
There were no new listings and redemptions of Non-sovereign Bonds listed on FMDQ Exchange in June 2024, as such the value of Non-Sovereign Bonds outstanding remained flat at N2, 192.02billion.
The total value of CPs quoted on FMDQ Exchange in June 2024 was N92.54billion, representing a MoM decrease of 64.16 percent (N165.64) from the value of CPs quoted in May 2024 (N258.19bn).
In June 2024, quoted CPs were issued by institutions from the Financial Services (8) and Manufacturing sectors (3) only. As a result, the outstanding value for CPs increased MoM by 5.64 percent (N52.21bn) to N978.52billion in June 2024 offsetting the impact of the N39.70bn worth of CPs that matured during the review period.
Spot market
Total spot market turnover for all products traded in the secondary market in June 2024 was N25.95trillion, representing a MoM decrease of 35.16 percent (N14.07trn) from May 2024 figures.
The MoM decrease in total spot market turnover was driven by the decrease in turnover across all spot market product categories, as FX, FI and MM turnover decreased MoM by 38.84 percent (N6.35trn), 30.47 percent (N3.38trn) and 34.50% (N4.33trn), respectively.
The decrease in MM turnover was driven by the MoM decrease in Repos/Buy-backs and Unsecured Placement/Takings transactions. Similarly, the decline in FI turnover was driven by the decrease in FGN Bonds, T.bills, OMO Bills, and CBN Special bills offsetting the increase in Other Bonds.
Spot FX market turnover was $6.72billion (N10.01trn) in June 2024, representing a 41.17 percent ($4.70bn) MoM decrease from the turnover recorded in May 2024 ($11.42bn).
In the FX Market, the Naira depreciated against the US Dollar, with the spot exchange rate ($/N) increasing by 3.61 percent ($/N51.87) to close at an average of $/N1, 487.74 in June 2024 from $/N1, 435.87 recorded in May 2024. Further, exchange rate volatility decreased in June 2024 as the Naira traded within an exchange rate range of $/N1, 473.66 – $/N1, 510.10 compared to $/N1, 173.88 – $/N1, 533.99 recorded in May 2024.
FI market turnover in June 2024 was N7.72trn, representing a MoM decrease of 30.47 percent (N3.38trn) from the turnover recorded in May 2024 (N11.10trn).
The MoM decrease in turnover was driven by the decrease in turnover across all FI product categories offsetting the 60.51 percent (N0.02trn) increase in Other Bonds* transactions.
As a result, the trading intensity (TI) for FGN Bonds and T.Bills decreased MoM by 0.19bps and 0.03bps to 0.14 and to 0.05, respectively.
May
In May 2024, the total secondary market turnover on FMDQ Exchange was N41.69trillion, representing a MoM increase of 51.62 percent (N14.19trn) and a YoY increase of 164.26 percent (25.92trn) from April 2024 and May 2023 figures, respectively. Foreign Exchange (FX) and Money Market (MM) transactions dominated secondary market activity, jointly accounting for 73.37 percent of the total secondary market turnover in May 2024.
April
Investments recorded a significant drop on the floor of the FMDQ Exchange with turnover recording a month on month drop of 48.45 percent or N11.8 trillion in April. Year on year, investment declined by N6.79 trillion, representing 35.09 percent compared with the figure posted in April 2022. Turnover at the end of April 2023 stood at N12.55 trillion.
Breakdown of activities showed that foreign exchange (FX), CBN Bills and money market (MM) transactions dominated secondary market activity in April 2023, accounting for 79.65 percent of the total secondary market turnover.
Total spot market turnover for all products traded in the secondary market was N10.60 trillion in April 2023, representing a MoM decrease of 49.04 percent (N10.19trn) from March 2023 figures. The MoM decrease in total spot market turnover was jointly driven by a decline in turnover across all products with contributions by MM, FI and FX decreasing MoM by 43.84 percent (N2.62trn), 52.71 percent (N5.63trn) and 47.08 percent (N1.94trn), respectively. The decrease in MM turnover was driven by a decrease in Repos/Buybacks and Unsecured Placement/Takings transactions. Likewise, the decline in FI turnover was driven by a MoM decrease across all FI products in the review period.
Market turnover was N2.18trillion ($4.72bn) in April 2023, representing a MoM decrease of 47.08 percent (N1.94trn) from the turnover recorded in March 2023 (N4.13trn).
In the FX Market, the Naira depreciated against the US Dollar, with the spot exchange rate ($/N increasing by 0.34 percent ($/N1.59) to close at an average of $/N463.09 in April 2023 from $/N461.50 recorded in March 2023. Further, exchange rate volatility increased marginally in April 2023 as the Naira traded within an exchange rate range of $/N462.00 – $/N464.00 compared to $/N461.00 – $/N462.00 recorded in March 2023.
March
Secondary market turnover on FMDQ Exchange in March 2024 was N48.87trn, representing a MoM and YoY increase of 21.22 percent (N8.55trn) and 100.67 percent (24.51trn) from February 2024 and March 2023 figures, respectively. Foreign Exchange (FX) and Money Market (MM) transactions dominated secondary market activity, jointly accounting for 75.36 percent of the total secondary market turnover in March 2024.
“The Nigeria 10-Year Government Bond Yield increased to 19.30% in May 2024 from 14.55% in May 2023. The increase in bond yields resulted from attractive rates on OMO and treasury bills, spurred by the rise in the MPR”
Stock market half year performance
On the flipside, investors on the Nigerian Exchange Limited, NGX gained over N15.6 trillion in the first half of the year 2024, a situation attributed to the forex market reforms introduced by the Central Bank of Nigeria, CBN.
Specifically, the market capitalisation, which represents the total value of equities listed on the Exchange, rose to N56.601 trillion at the end of H1’24 from N40.917 trillion at the end of December 2023.
Similarly, another gauge of the market, NGX All Share Index, ASI rose to 100.057.49 points at end of H1 ’24 from 74,773.77 points at the end of December 2023.
The Year-to-Date, YtD return of the ASI stands at an impressive 33.81 percent despite recent bearish trends seen in Q2 of the year.
Q1and Q2 performance
Meanwhile, the equities market recorded mixed performances in the first two quarters of 2024.
The first quarter saw a return of 39.84 percent, driven by strong company earnings, and positive dividend announcements and also propelled by the listing of Transcorp Power Plc, a subsidiary of Transcorp Plc on the NGX.
The company listed 7.5 billion shares at N240.00 per share by introduction on the Main Board of the Exchange.
The market positive sentiment among investors during the quarter was also attributed to several factors, including favourable policies introduced by President Bola Tinubu’s administration such as the removal of fuel subsidies, streamlining of exchange rates and the floating of the naira.
By contrast, the second quarter experienced a decline, with returns falling to -4.31 percent as of the close of the last trading day of June 28.
The downturn in Q2 ’24 was largely attributed to the increased monetary tightening by the CBN which triggered further increase in interest rate, hence making fixed income investment more attractive compared to the equities market.
Analysts’ remarks
Financial analysts emphasized that the FX reform initiated by the CBN has brought in some confidence in the market leading to the attraction of the foreign investors that have helped to fuel the market.
Analysts at InvestData Consulting stated, “Although, we see fiscal and monetary policies trying to return the nation’s economy to the path of recovery, despite the continued mismatch of policies and implementation style while oscillating oil production output persists in the midst of exchange market challenges.
“Ahead of the half-year earnings season, more companies like Ucap, Accesscorp, MTNN and UACN have informed the market of their closed period and board meetings to approve the second quarter earnings report, in the face of more Annual General Meetings notifications, just as some other companies presented resolutions from their meetings. The latest were from MRS Oil Nigeria, among others, while Airtel Africa updated the market of its ongoing share buyback. SterlingNG, Ucap and FBNH informed the market of yet another insider dealing in its shares.
“In the midst of all these, it is safe for investors to target companies with consistent track records of dividend payment, strong fundamentals and growth prospects that will support further growth in earnings which price feeds on in any market cycle.”
Commenting, former President, Chartered Institute of Stockbrokers, Olatunde Amolegbe, said, “The CBN’s reform of the FX market has led to increased confidence by foreign investors that has helped to boost the market even with the support of local institutional investors.”
