How the Naira is Affecting the Nigerian Stock Market

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On Tuesday, the naira fluctuated between N444 and N446 per dollar in the official market. However, the rate on the parallel market was N745 per dollar.

The parallel market, where the dollar is freely exchanged but at an 80% premium over the official spot exchange rate, is where many companies and investors buy dollars.

Meanwhile, the exchange rate crisis is negatively affecting the Nigerian stock market. Although the official depreciation of the naira against the dollar this year is 4%, many international portfolio managers seeking to repatriate funds from the country cannot afford that rate due to cash shortages.

Highlighted below are some of the ways in which the Nigerian forex/exchange rate crisis is affecting the stock market.


1. Foreign investors yet to return

Foreign participation in Africa’s largest economy has yet to return to normal since the pandemic-induced capital flight. This is partly due to the overvalued naira in the official market and the country’s unstable macroeconomic environment.

  • The participation of foreign portfolio investors in the Nigerian domestic stock market has declined solely due to the volatility of the country’s foreign exchange market, which is mainly the result of poor exchange rate management and declining foreign exchange reserves. .
  • However, Nigeria’s Foreign Portfolio Investments, or FPI, 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” due to rapid entry and exit, analysts believe that the higher balance in the FPI position is due to the inability of investors to withdraw their funds due to a lack of foreign exchange.

2. 59% decrease in foreign direct investment

Meanwhile, the strong appetite of domestic investors has continued to outpace international investors in the Nigerian stock market.

Total domestic transactions accounted for 77% of all transactions made in 2021, while foreign transactions accounted for 23% of all transactions made during that time.

  • Based on 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 due to risk aversion ahead of the 2023 general election and a lackluster macroeconomic backdrop.
  • Note that the high level of insecurity in Nigeria has also contributed in part to a 59% decline in foreign direct investment over the past 11 years.

conclusion

Africa’s largest economy is suffering from a sharp drop in foreign investment, both portfolio and direct, which has reduced currency liquidity.

This has been compounded by falling export earnings, which is mainly attributed to declining crude oil export earnings despite an increase in diaspora remittances and non-oil export earnings.

The devaluation of the local currency could imply that domestic investors will want more cash to maintain their current standard of living from a local point of view. And to do that, they may need to sell part of their shares.

This explains why the market has been under stagnant pressure in relative terms. This pattern may last for a while, except that there is a convergence between the black market and the official naira.

… How the Naira Is Affecting the Nigerian Stock Market Read more at … Naijaonpoint.

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