The Naira has been volatile in recent months due to dollar shortages caused by the exit of foreign investors during a period of low oil prices and notable economic pressures.
The Central Bank of Nigeria (CBN) has had difficulty meeting the demand for dollars from foreign investors, banks, and airlines amongst others, which has made investors reluctant to return. This has resulted in the over 60% devaluation of the Naira.
Recently, the CBN began taking steps to address the dollar shortage; including settling the backlog of foreign exchange forward contracts owed to banks estimated at about $7 million.
The apex bank has fulfilled more than 75 percent of the outstanding foreign exchange forwards that have matured in certain banks.
Also, the Finance Minister stated that the country was expecting up to $10 billion in fresh foreign exchange inflows in the coming weeks.
These actions have provided some support to the Naira against the dollar in the parallel market.
It was also gathered that some market speculators were selling dollars they had been hoarding, taking seriously the government’s plan to boost market liquidity.
This has increased the supply of foreign exchange in accessible markets although more recent pricing suggests the rebound is losing steam and reversing.
Investors can mitigate the effect of the Naira volatility on their portfolio by investing in solutions that match their profile and investment objectives.
Options in order of liquidity include fixed deposits (90 or 180 day), dollar bond funds (typically 180day lock-in) and Eurobonds which are multi-year dollar bonds that pay interest income (coupons) typically every 6-months.
These enable you earn additional income while safeguarding your funds against local currency risk and inflation.
As always, please speak to an Advisor for sound, financial advice.
[Source: AXA Mansard newsletter, November 10, 2023]
