2022: Elections, forex to impact foreign portfolio investment inflow – analysts

FILE PHOTO - A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS-Yuriko Nakao-File Photo

With the general elections just around the corner in 2023, analysts at United Capital have said, inflows from foreign portfolio investors (FPIs) will continue to remain low, even as analysts at Cordros Research stressed the need to attract more foreign exchange inflow to replenish the depleting external reserves.

The external reserves of the country had declined to $40.34 billion, a 0.4 or $174.17 million depreciation within the first 20 days of the year. While the analysts at Cordros Research believe that the CBN has enough supply to support the foreign exchange market, believe that increased dollar inflow would further strengthen the local currency’s position.

The reserves, according to the analysts, will remain adequate “over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low.

“Thus, FPIs which have historically supported supply levels in the investor’ and Exporters’ window will be needed to sustain forex liquidity levels. Hence, we think further adjustments in the naira to dollar peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.”

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Meanwhile, analysts at United capita believe the election jitters alongside the unrelenting FX debacle, upcoming elections, and volatile macroeconomic environment will continue to impact negatively, FPI inflows into the Nigerian equities market.

“For the equities market, from our analysis of the current investment and economic climate, we struggle to see significant improvement in investor appetite towards equity instruments in 2022.

into 2022, our prognosis for the yield environment is that we expect a higher yield curve in 2021, premised on aggressive government borrowing and a hawkish monetary policy.

“The government plans to borrow N5.2tn from the domestic and international debt market to finance its 2022 budget deficit. Also, policy normalisation in developed markets, depressed FPI flows, and stubborn inflationary pressures are factors that we expect to support a preference for tighter monetary policy,” the stressed.

The yield environment, they said, was an intriguing phenomenon in 2021 as the fixed income market rebounded after record lows in 2020, adding that, expectation of a rate reversal on the back of tighter system liquidity increased domestic debt financing, and demand for higher rates from private sector money managers materialised.

“True to our expectations, average yield across the yield curve reversed higher, albeit faster than initially projected in H1- 2021. However, yields began to moderate in Q3-2021. The major drivers of the higher yield environment were tighter system liquidity and the government’s reliance on the domestic debt market. In the international debt market, the government issued $4.0bn worth of Nigeria Outlook FY-2022: Navigating Stormy Seas Eurobond to finance its 2021 budget deficit.

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“We project economic growth of 1.6 per cent y/y, buoyed by a decent recovery in the oil sector from a two-year-long recession, as an increase in the Organisation of Petroleum Exporting Countries (OPEC)’s production quota and the low base effect will drive growth. In addition, we expect sustained growth in the agricultural and services sectors, supported by strong demand for food and improved internet adoption amid the roll-out of the 5G network.

“On price movement, we anticipate inflationary pressures to weigh on the market as the high base effect wears off and the true impact of imported inflation reflects on the headline inflation numbers. As a result of price pressures and policy normalisation in the global economy, we anticipate a hawkish policy tone from the Monetary Policy Committee (MPC),” he pointed out..

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