The naira fluctuated between N444 and N446 to the dollar in the official market on Tuesday. However, the parallel market rate was N745 to the dollar.
Many firms and investors buy dollars in the parallel market, where the dollar is freely exchanged but at a premium of 80% to the official spot rate.
Meanwhile, the exchange rate crisis is having a negative impact on Nigeria’s stock market. Although the naira has depreciated by 4% against the dollar this year, many international portfolio managers looking to repatriate funds from Nigeria cannot access that rate due to a lack of hard cash.
Some ways Nigeria’s forex/exchange rate crisis affects the stock market are highlighted below.
Foreign investors yet to return
Since the pandemic-induced capital flight, foreign involvement in Africa’s largest economy has not yet returned to normal. This is partly because of overvalued naira at the official market and the country’s unstable macroeconomic environment.
- Foreign portfolio investors’ participation in the Nigerian domestic stock market has decreased solely because of the country’s volatile foreign exchange market, mostly due to subpar exchange rate management and declining foreign reserves.
- However, Nigeria’s Foreign Portfolio Investments, or FPIs, increased by 11.8% to N321.04 billion in the third quarter of 2022, or Q3’22, from N287.2 billion in the same period of 2021, or Q3’21.
- FPI is a measure of the value of foreign investments in Nigerian stocks. Despite being referred to as “hot money” because of the quick entry and leave, analysts believe the higher balance in the FPI position is due to the investors’ inability to withdraw their funds due to the lack of foreign exchange.
59% decline in foreign direct investment
In the meantime, domestic investors’ strong appetite has continued to outperform international investors in the Nigerian stock market.
Total domestic transactions made up 77% of all transactions made in 2021, while overseas transactions made up 23% of all transactions made during that time.
- According to the transaction data for 2022, there were N1.729 trillion in total domestic transactions and N349.59 billion in total foreign transactions.
- But since the start of the year’s second half, there has been a slowdown in overall market activity because of risk aversion ahead of the general election in 2023 and a lacklustre macroeconomic backdrop.
- Note that Nigeria’s elevated level of insecurity has partly also contributed to a 59% decline in foreign direct investment during the past 11 years.
Conclusion
Africa’s largest economy is experiencing a sharp decline in foreign investments, both portfolio and direct, resulting in reduced FX liquidity.
This has been exacerbated by a drop in export revenues, which is primarily due to a drop in crude export revenue despite an increase in diaspora remittances and non-oil export receipts.
Domestic investors may require more cash to maintain their current standard of living in the event that the local currency depreciates. And in order to do so, they may have to sell some of their stock.
This explains why the market has been under relative pressure for so long. This pattern may continue for a while, unless the naira’s official and black markets converge.
