Stock Market Surges 12% in Three Weeks on Rising Investor Confidence in FX Window

• Nigeria’s monthly FX inflow dropped to $2.61bn in January

 BY Goddy Egene and Obinna Chima 

From being the worst performing market among its emerging market peers, the Nigerian equities market has made record gains for three weeks in a row, surging by 11.9 per cent, following renewed demand for stocks by foreign portfolio and domestic investors on the back of introduction of the new foreign exchange window for investors and exporters by the Central Bank of Nigeria (CBN).

In a bid to boost liquidity in the forex market, the CBN introduced the window last April that allows market participants to determine the exchange rate of the naira on a willing buyer, willing seller basis.

But to promote liquidity and professional market conduct, the central bank may from time to time participate in the market.

Transactions under the new window include invisible transactions such as loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management service fees, consultancy fees, software subscription fees, technology transfer agreements, personal home remittances and any such other eligible transactions including “miscellaneous payments” as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.

CBN, however, excluded international airlines ticket sales’ remittances.

Following the introduction of the new window for investors and exports, the Nigerian Stock Exchange (NSE) All-Share Index has spiked by 11.92 per cent in the last three weeks, from 25,189.27 to close at 28,192.46 last Friday, while market capitalisation gained N1.03 trillion or 11.81 per cent, from N8.716 trillion to N9.741 trillion.

The volume and value of trading also witnessed unprecedented gains, as investors traded 5.742 billion shares valued at N48.848 billion in 158,346 deals in three weeks.

A breakdown of the market’s performance showed that in the week ended April 28, 2017, the index rose by 2.26 per cent to close at 25,758.51, while market capitalisation closed at N8.913 trillion. Investors exchanged 1.33 billion shares valued at N9.671 billion in 16,300 deals.

The second week of the bullish trading saw the index rise by 1.85 per cent to close at 26,235.63, just as market capitalisation closed higher at N9.069 trillion. In the week, which ended May 5, investors also exchanged 1.154 billion shares worth N10.439 billion.

However, the market made record-breaking gains last week when the index surged by 7.46 per cent to close at 28,192.46, while market capitalisation rose to N9.741 trillion. Equally, the volume of trading jumped to 3.255 billion shares valued at N28,738 billion in 25,370 deals.

With the gains recorded last week, the year-to-date performance of the Nigerian bourse swung into the positive territory, appreciating by 4.9 per cent.

Commenting, analysts at Cordros Capital Limited said they sensed improved investor appetite for risk assets on the Nigerian bourse, judging by market activity in the past three weeks, and more specifically the spike in the number of deals and the volume of shares traded last week.

They linked the performance to reduced apprehension in the macroeconomic environment, impressive full year 2016 and 2017 first quarter (Q1) results of highly capitalised companies, as well as increased confidence and liquidity in the forex market.

Supporting this assessment, analysts at Afrinvest (W.A) said foreign investors’ appetite for Nigerian assets had waned significantly on the back of the currency crisis, which in turn had fundamentally weakened macroeconomic environment, dragged corporate earnings, and impacted negatively on the equities market.

“However, in April, investor sentiment strengthened following the commencement of the Investors’ & Exporters’ (I&E) FX window which signalled a possible return of flexibility in forex rate determination, though multiplicity of rates at the official window is still a concern.

“Additionally, recent improvements in global oil prices above the $45/b mark, improvement in domestic production currently above 2.0mbpd, fiscal responsiveness – including the release of the EGRP (Economic Growth and Recovery Plan), the successful issuance of US$1.5 billion Eurobond, passage of the 2017 budget, and improvement in the manufacturing PMI, suggest a possible rebound in economic activities from Q2 2017,” they said.

Afrinvest explained that the NSE benchmark index recorded a decline on only two trading days since the launch of the FX window while appreciating 11.9 per cent post-launch, with YTD returns improving to 4.9 per cent last Friday.

Meanwhile, the CBN yesterday assured market participants of its continued intervention in the interbank FX market.

The Bank said that it was determined to ensure that the gains made in recent weeks, with respect to the stability of the exchange rate, were not eroded.

While explaining that the central bank did not make major interventions throughout last week because there was forex glut in the system, a CBN source said that the Bank would continue to make the necessary interventions to ensure the stability of the naira.

The source further disclosed that the windows established by the CBN for small and medium enterprises (SMEs) as well as for investors and exporters were yielding the desired results by providing access to forex and easing pressure on the market.

Speaking on the matter, CBN spokesman, Isaac Okorafor reiterated the Bank’s commitment to ensure that there is enough supply of forex to genuine customers to achieve the forex rate convergence in the market.

The CBN, in its economic report for January which was released at the weekend, also indicated that Nigeria’s forex inflow through the Bank fell by 23 per cent to $2.61 billion in January 2017, compared with $3.21 billion in the preceding month.

But the report stated that the FX inflow recorded in the month under review recorded an increase of 96 per cent, relative to the inflow in the corresponding period in 2016.

Clearly, the significant increase in FX inflow was one of the factors that emboldened the CBN in its interventions in the market since February this year, resulting in a 27 per cent appreciation of the naira on the parallel market.

According to the report, despite the gradual recovery of oil prices in January 2017, external sector performance was weak during the month, mainly due to reduced inflow through the Current Account.

Also, inflow through the Capital and Financial Account was constrained, on account of low expectations of the increased flexibility of the naira exchange rate and the gradual increase of interest rates in developing countries.

However, the drop in inflows relative to the preceding month was attributed to the fall in other official receipts during the month under review.

“Aggregate outflow through the CBN, at US$1.06 billion, declined by 28.1 per cent and 37.4 per cent below the levels in the preceding month and the corresponding period of 2016, respectively.

“The development was due largely to the decline in interbank utilisation. Overall, a net inflow of US$1.55 billion was recorded through the CBN, in contrast to the net outflow of US$1.92 billion in the preceding month.

“Aggregate foreign exchange inflow into the economy was US$4.75 billion in January 2017. This represented 39.3 per cent and 11.6 per cent declines below the levels at end-December 2016 and the corresponding month of 2016, respectively.

“The development relative to the preceding month reflected the decline in inflow through both the Bank and autonomous sources. Inflow through the CBN and autonomous sources accounted for 54.9 per cent and 45.1 per cent, respectively.

“Non-oil sector inflow, at US$1.99 billion (41.9 per cent of the total), fell by 26.0 per cent, below the level in the preceding month. Autonomous inflow, also declined by 51.7 per cent, below the preceding month’s level.

“Aggregate foreign exchange outflow from the economy, at US$1.23 billion, declined by 31.4 per cent and 35.8 per cent, below the levels in the preceding month and the corresponding month of 2016, respectively.

“Thus, foreign exchange flows through the economy, resulted in a net inflow of US$3.52 billion in the reviewed month, compared with US$6.02 billion and US$3.45 billion in December 2016 and the corresponding month of 2016, respectively,” it added.

Furthermore, the report showed that improvement in domestic production recorded in the preceding month was sustained in the reviewed month, following reduced disruption to oil production by militants and repairs of previously damaged oil installations.

It pointed out that the exemption of Nigeria from the production-cut agreement by OPEC and 11 non-OPEC countries also provided the opportunity to ramp-up production.

“Consequently, Nigeria’s crude oil production, including condensates and natural gas liquids stood at an average of 1.57 million barrels per day (mbpd) or 48.67 million barrels (mb) in the reviewed month.

“This represented an increase of 0.03mbpd or 1.95 per cent above the average of 1.54mbpd or 47.74mb recorded in the preceding month. Crude oil export stood at 1.12mbpd or 34.72mb, representing an increase of 2.75 per cent, compared with 1.09mbpd or 33.79mb in the preceding month.

“Allocation of crude oil for domestic consumption remained at 0.45mbpd or 13.95mb during the reviewed period.

“To accelerate the rebalancing of the global oil market, the production adjustment agreement between 11 non-OPEC oil producers with 13 OPEC member countries took effect from Jan 1, 2017.

“Consequently, there was a marginal price increase in global oil prices due to the gains of the cooperation.

“The average spot price of Nigeria’s reference crude, Bonny Light (37° API), rose from US$54.10 per barrel in December 2016 to US$55.10 per barrel in January 2017, representing an increase of 1.85 per cent.

“UK Brent at $54.41/b, Forcados at $54.81/b and the WTI at $53.35, exhibited similar trends as the Bonny Light,” the report stated.

Nevertheless, federally-collected revenue (gross) at N424.92 billion in January 2017, was lower than both the provisional monthly budget estimate and the receipt in December 2016 by 46.4 and 15.3 per cent, respectively, the report revealed.

The shortfall in federally-collected revenue (gross) relative to the preceding month’s level was attributed to the decline in receipts from both oil and non-oil revenue sources.

Gross oil receipts at N212.32 billion or 50.0 per cent of total revenue fell below the provisional monthly budget estimate and December 2016 collection by 27.9 and 16.2 per cent, respectively.

The decrease in oil revenue, relative to the provisional monthly budget estimate, was attributed to the decline in crude oil/gas export receipts, due to pipeline vandalism and emergency repairs.

Also, consistent with the tight monetary policy stance of the Bank, the report showed that the banking system’s net claims on the economy fell at the end of the first month of 2017.

At N26.624 trillion, aggregate domestic credit fell by two per cent at end-January 2017, in contrast to the 2.8 per cent growth at the end of the corresponding period of 2016.

The development reflected the decline of 10.9 per cent and 0.03 per cent in net claims on the federal government and credit to the private sector, respectively.

Following the 20.8 per cent decline in direct loans to the federal government by the CBN, particularly the 21.3 per cent decline in Ways and Means Advances, the banking system’s credit to the government declined in January 2017.

Relative to the level at end-December 2016, net claims on the federal government fell by 10.9 per cent at end-January 2017, in contrast to the 18.2 per cent growth at the end of the corresponding period in 2016.