40.2% rise in NAFEM inflow unsustainable, say analysts

Total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM), which rose to a five-month high in October, increasing by 40.2 per cent month-on-month (m/m) to $3.04 billion from $2.17 billion in September may not be sustained, analysts at Cordros Capital Research have said.

According to them, the uptick is unlikely to be sustained owing to unfavourable macroeconomic conditions, the weak structure of the Nigerian foreign exchange (FX) market and sustained volatility in the naira.

Also, the analysts predicted that the limited inflows from the Central Bank of Nigeria (CBN) may pose downside risks to overall liquidity in the near term, potentially dampening market confidence and heightening pressure on the naira.

“While we acknowledge the recent liquidity influx from foreign investors, we believe this is unlikely to be sustained given the unfavourable macroeconomic conditions, weak structure of the Nigerian FX market and sustained volatility in the naira,” the report said.

The improvement in total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) was primarily due to a substantial increase in inflows from foreign sources (44.6 per cent of total inflows), the report said.

It explained that in comparison, collections from local sources (55.4 per cent of total inflows) dropped for the second consecutive month.

Inflows from foreign sources increased by 292.7 per cent m/m to $1.37 billion (September: $345.5 million), reflecting the highest level in seven months in line with improved carry trade opportunities in the capital market over the review period.
As a result, higher accretions were recorded across the FPI (+510.9 per cent m/m) and FDI (+44.6 per cent m/m) segments, while inflows from other corporate segments (-15.1 per cent m/m) dropped.

“Elsewhere, inflows from local sources declined by 7.5 per cent m/m to $1.69 billion in October (September: $1.82 billion) driven by declines across collections from the individuals (-30.6 per cent m/m), CBN (-14.3 per cent m/m), and non-bank corporates (-8.6 per cent m/m) segments, amid a marginal improvement in the exporters/importers (+0.6 per cent m/m) segment.

Meanwhile, the total turnover in FX spot and derivatives markets for the week ended November 1, was $865.4 million, representing a decrease of 41.9 per cent ($626.11 million) from $1,491.54 million reported for the week ended October 25, 2024.
FMDQ said the week-on-week (w/w) decrease in total turnover was driven solely by the 41.9 per cent ($626.11 million) decrease in FX Spot transactions, which recorded a total value of $865.43 million compared to $1.49 billion in the week ended October 25 as there were no FX Derivatives transactions during the week-ended November 1.

Also, during the period, the average Nigerian Autonomous Foreign Exchange Fixing (NAFEX) was $/N1,658.66, compared to $/N1,646.72 recorded in the week ended October 25.