By Nkiruka Nnorom

EFG Hermes, a Lagos based financial services company, has cited the nation’s   inability to build a buffer of foreign reserves despite the rise in the international prices of crude oil, as a deterring factor for   foreign portfolio investment (FPIs) inflow into the country.  

Kato Mukuru, Managing Director/Head of Frontier Markets Research at the company, stated this at the company’s second quarter (Q2) media round-table, saying that the recent moves by the Central Bank of Nigeria (CBN) to stop the supply of foreign exchange (FX) to the Bureau De Change operators would put further pressure on the naira and keep inflation elevated in the next six to 12 months,   consequently, impeding inflow into equities.

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Recall that Nigeria’s foreign reserves fell by $1.12 billion to $34.25 billion in the first half of the year (H1’21) despite the prices of oil averaging at $65 per barrel during the period in a clear break with historical trend.  

Also, foreign portfolio investment in the Nigerian Exchange (NGX)   Limited fell by 16.8 per cent or N2.81 billion to N13.92 billion in H1’21, according to data from the NGX.   Equities market is currently down -3.6 percent Year-to-Date (Y/D).

Mukuru said though the upcoming $6.2   billion Eurobond issuance in addition to the expected injection of $3.4   billion from the SDR allocation may fuel new adjustment round the naira but it might not create enough excitement to attract foreign investors without clear evidence of build up in the reserves.

“We are basically eyeing an upcoming $3 billion to $5 billion   Eurobond issuance as well as a $3 billion injection from the SDR allocation to provide much-needed firepower to help fuel a new adjustment round for the naira. With such a one-off large boost to reserves, the CBN could start supplying more FX to the market and push for a conversion of the parallel and official rates towards our projected N430.  “However, we do not think the move would create much excitement if it is not followed by clear evidence of a build-up in reserves in order to attract portfolio inflows, which remain the key foreseeable source of FX supply, in addition to oil. The lack of this is, clearly, weighing on investor confidence,” he said.