Expected FX inflows not enough to meet rising dollar demand

EXPECTED foreign exchange (FX) inflows, including revenue from crude oil sales, will fall short of addressing the growing demand for the dollar, according to a new report by FSDH research.

The value of the Naira to the dollar on Friday printed at ₦902.45/$ at the Nigerian Autonomous Foreign Exchange Market (NAFEM).

The depreciation is attributed to robust dollar demand due to a currency scarcity in the official FX market. This prompts an uptick in legitimate needs being fulfilled through the parallel market, where one dollar trades at an average rate of N1,300.

FSDH analysts anticipate sustained pressure on the FX market driven by heightened demand for imported goods and services.

They highlight that overall GDP growth is insufficient to meet domestic needs. Despite an expected improvement in foreign portfolio investment inflow in 2024, the economy is projected to remain below pre-COVID FPI volumes, with an average exchange rate of N925 per US$ in the official market for the year.

The analysts said, “Although foreign portfolio investment inflow is expected to improve relative to 2023 to take advantage of high-interest rates, the economy will still be far from attaining the volume of FPIs pre-COVID. We anticipate an average exchange rate of N925 per US$ in the official market in 2024.”

The report predicts that the Federal Government (FG) will continue to lean on the domestic debt market to bridge its budget deficit. While bilateral and multilateral loans are expected, accessing the Eurobond market proves challenging due to the heightened global interest rate environment.

The report forecasts that the FG is set to borrow N6.0 trillion from the bond market, emphasizing a preference for longer tenors. In the face of anticipated maturities and fresh inflows throughout the year, FSDH projects an imbalance where bond supply surpasses demand, subsequently pushing bond yields upward.

FSDH’s estimates indicate an expected rise in bond yields with average rates as follows: 5-year bond yield (Average): 16.0 percent, 10-year bond yield (Average): 17.0 percent, and 30-year bond yield (Average): 18.0 percent.

This outlook reflects the challenges posed by the global economic landscape, emphasizing the FG’s strategy to navigate fiscal responsibilities amid evolving financial conditions.

The latest FSDH report outlines expectations of a more restrictive monetary policy in the first half of 2024 as part of a strategic move to curb inflation through aggressive liquidity mop-ups.

Anticipating the Federal Government’s financial manoeuvres, the report suggests a plan to raise approximately N6.0tn through the domestic debt market, excluding ways and means. This figure surpasses the total maturity from the sovereign debt market (N3.25tn) combined with new pension fund flows estimated at N585bn. The report highlights potential strain on system liquidity throughout the year due to these bond issuances, with additional considerations for new fund flows from Deposit Money Banks (DMBs).

Furthermore, the report draws attention to the estimated N6.6tn in total NT-bill maturities by January 16, expecting them to be rolled over, given the government’s revenue constraints. In light of these factors, FSDH projects an overall higher NT-bills rate averaging at 13.0 percent throughout 2024.

This analysis underscores the anticipated fiscal measures and their potential impacts on the financial landscape, providing insights into the evolving economic strategies for the year ahead.

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