Naira’s Appreciation Explained: Key Factors and Future Projections

The naira, Nigeria’s local currency, has witnessed a notable appreciation in recent weeks, sparking optimism among investors and financial analysts. From trading at N1,660/$1 on Monday to a stronger N1,608/$1 by Wednesday, this trend signals a renewed sense of confidence in the Nigerian economy. But what are the forces behind this shift, and how sustainable is it?

Transparency Boost with EFEMS

On Monday, the Central Bank of Nigeria (CBN) introduced the Electronic Foreign Exchange Matching System (EFEMS). This groundbreaking platform aims to combat speculation and infuse greater transparency into Nigeria’s foreign exchange market. By automatically matching buy and sell orders, EFEMS ensures efficiency and fairness in FX transactions.

Market insiders have highlighted that EFEMS has revealed previously untapped liquidity in the banking sector. A source familiar with the system noted that the newfound transparency has reassured investors, encouraging confidence in the naira’s value.

Foreign Portfolio Investors on the Rise

Another significant driver of the naira’s recent strength is the influx of Foreign Portfolio Investors (FPIs) into Nigeria’s financial markets. Gbolohan Ologunro, a portfolio manager at FBNQuest, attributed this trend to attractive yields on treasury bills and OMO (Open Market Operations) auctions.

Recent auctions have seen yields hit record highs, with one-year NT-bills peaking at 30.71% before settling at 29.75%. These elevated yields have drawn foreign investors, who are capitalizing on the opportunity to hold naira-denominated assets.

Uduak Jacob, portfolio manager at Comercio Partners Asset Management, pointed out that FPIs are flooding the market with dollars in anticipation of further opportunities in Nigeria’s bond markets. This surge in dollar inflows has bolstered the naira’s value and contributed to its steady appreciation.

Eurobond Sales: A Game-Changer for Reserves

Adding to the optimism is Nigeria’s successful return to the international bond market. On Monday, the Federal Government sold $2.2 billion worth of Eurobonds in two tranches, with a combined oversubscription of $9.1 billion.

The proceeds from these sales are expected to flow into Nigeria’s foreign exchange reserves by December 9, 2024. Analysts at CSL Stockbrokers project that this influx could elevate reserves to over $42 billion by year-end, granting the CBN greater capacity to stabilize the naira.

Projections for the Naira’s Future

Experts are cautiously optimistic about the sustainability of the naira’s appreciation. If EFEMS continues to operate efficiently and yields remain attractive, FPIs are likely to maintain their interest in naira assets.

Gbolohan Ologunro forecasts that dollar inflows from Eurobond proceeds could push reserves to $45 billion by January 2025, further supporting the naira. However, sustaining this momentum will depend on Nigeria’s ability to address structural economic challenges and maintain investor confidence.

Conclusion

While the naira’s recent appreciation offers a welcome respite, its long-term stability hinges on multiple factors, including consistent policy implementation, robust reserves, and sustained foreign investor interest. The introduction of EFEMS, coupled with favorable market conditions, has set a positive tone, but the journey ahead requires vigilance and strategic management.

For more on this story, read the original article on Business

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