How the naira is affecting Nigeria’s stock market
On Tuesday, the naira fluctuated between N444 and N446 to the dollar at the official market. However, the rate on the parallel market was N745 to the dollar.
The parallel market, where the dollar is freely exchanged but at a premium of 80% to the official spot rate, is where many firms and investors buy dollars.
In the meantime, the exchange rate crisis is negatively affecting Nigeria’s stock market. Although the naira’s official depreciation against the dollar this year is 4%, many international portfolio managers looking to repatriate funds from the country are unable to access that rate due to a scarcity of hard cash.
Highlighted below are some of the ways Nigeria’s forex/exchange rate crisis is affecting the stock market.
1. Foreign investors yet to return
Foreign involvement in Africa’s largest economy has not yet returned to normal since the pandemic-induced capital flight. 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, which is mostly the result of 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.
2. 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 second half of the year, 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 the elevated level of insecurity in Nigeria has partly also contributed to a 59% decline in foreign direct investment during the past 11 years.
Africa’s biggest economy is suffering from a sharp decline in foreign investments, both portfolio and direct investments, which has reduced FX liquidity.
This has been made worse by the drop in export revenues, which is mostly attributable to the decline in crude export revenue despite an uptick in remittances from the diaspora and non-oil export receipts.
The devaluation of the local currency might imply that domestic investors will want more cash to maintain their current standard of living from a local standpoint. And to do that, they may need to sell some of their stock.
This explains why the market has been under stagnant pressure in relative terms. This pattern might last for a while, except there is a convergence between the naira’s official and black market.