• Hot money is back- tripling 2023 levels but still lower than 2019 highs. Largely flowing into Treasury and OMO bills.
• Thanks to recent central bank monetary policy and exchange rate policy adjustments
• More inflows should support currency stability for next 12 months. We see naira at 1400 per usd at year end.

Central bank reforms lure hot money back

FX and monetary policy reforms are paying off as hot money has returned to Nigeria. Latest data on capital importation shows the country attracted $3.38 billion in 1Q 24, up from $1 billion in 4Q 23.

Of this, $2.01 billion was in portfolio investment, while loans accounted for $1.15 billion. Within portfolio investment, the flows largely went to money market instruments ($1.6 billion) such as Treasury bills and OMO bills.

The numbers are exciting relative to recent trends but remain well below the highs of 2018 and 2019.

Monetary policy reforms act as the catalyst

The Central Bank of Nigeria (CBN) has introduced exchange rate reforms: currency devaluations, clearing of FX backlogs, paid maturing FX forwards, and reduced interventions in the FX market.

The CBN has hiked cumulatively by 750bp, taking the policy rate to 26.25%. We expect headline CPI to peak near-term at around 35%, and then to drop to 25% by year-end. That would leave ex ante real rates in a positive range.

The MPC hikes have become less and less with each meeting: Feb (400bp), March (200bp), and May (150bp).

The next committee meeting is scheduled for 22-23 July. It’s possible the CBN may hike one last time by 100bp. However, we lean towards a pause.

Fresh inflows should support USD-NGN stability

Attracting portfolio investors to the local market helps naira stability, in our view.

The researchers think that inflows from the World Bank ($2.25 billion already received), likely potential Eurobond issuance, and portfolio flows should keep the naira on a stable path in a N1,400-1,450 range.

As of today, the spot is around N1,500 per USD.