Analysts warn of naira depreciation amid N311bn equity sell-off

Financial analysts have expressed concerns over the recent trend of high foreign liquidation in the Nigerian Exchange with N311.41bn worth of investments withdrawn in the first half of this year.

This has sparked fears of naira devaluation and its potential impact on the Nigerian economy.

According to the NGX, in a report titled ‘Domestic & Foreign Portfolio Investment’, the N311.41bn worth of portfolio investments liquidated in the first half of the year compared starkly with the N73.06bn in foreign outflows recorded in the same period in 2023.

The report stated that foreign investments witnessed a surge, with inflows reaching N540.48bn, a 272.55 per cent increase from N145.08bn in 2023. Foreign outflows also increased, from N72.02bn in 2023 to N229.07bn in 2024

Speaking with our correspondent, a financial analyst, Olaid Baanu, highlighted the sharp increase in foreign capital inflows to N229.07bn in the first half of the year, up from N72.02bn in the same period in the previous year, stating that this initially indicated growing interest from foreign investors and bolstered market confidence.

However, the substantial liquidation value suggests a profit-taking sentiment among foreign investors. Baanu, a seasoned investment banker, explained, “While the increased inflows are encouraging, the high liquidation indicates that foreign investors are cashing out their profits, which could destabilise the market.”

He added that the depreciation of the naira in the NAFEM market by N598.19 (65.7 per cent) per United States dollar in the first half of the year further complicated the situation.

This devaluation affects the value of outflows, raising uncertainty about whether investors can achieve higher returns relative to the market growth of 33.8 per cent.

“Consequently, the liquidation is not expected to significantly impact the NGX as foreign investors now exhibit a bit of greater confidence in the Nigerian FX market compared to recent years,” Baanu noted.

In the short term, Baanu does not foresee any immediate implications for exchange stability due to the increasing participation of local investors. However, the long-term outlook is less optimistic.

“Could the liquidation be stopped? No, legitimate transactions cannot be stopped. However, the rate of liquidation could be slowed if the naira appreciates against other currencies, thereby providing foreign investors with higher returns on investment,” Baanu stated.

Analysts further warn that persistent high liquidation may erode market performance and dampen investor sentiment.

Also speaking to our correspondent, a broker, Bisi Bakare, stated that the high liquidation rate raises concerns about the NGX’s long-term stability.

“It has a lot of effect on the exchange because it will discourage foreign investors and local investors. If such a thing could happen to foreign investors, what is the guarantee for others? It will discourage foreign investors from coming and investing in the Nigerian capital market. It is not good enough and it is a bad image for capital market investors,” Bakare emphasised.

Stating the potential impact on the economy at large is another concern, the broker added, “When companies do not have trust in the business they are doing and the government can come at any time to do anything they want to do, investors are in trouble because they are likely to lose. Foreign investors need stability in their business.”

She noted that investors could face significant losses, adding that manufacturing companies and international breweries, which rely heavily on imports, are expected to be the most affected. The banking sector, in contrast, is likely to be the least affected.

“The Nigerian Exchange Limited can do better. There should be a lot of notice and awareness so that such companies can be aware ahead and if it can be avoidable. Investors are likely to lose trillions of naira. It is uncountable, and it is like putting salt on an injury,” Bakare said.

“The persistent high liquidation may recede market performance and truncate investor positive sentiment,” she warned, urging for measures to enhance investor confidence and market stability.

She stated that as the NGX navigates these turbulent times, all eyes are on the government and market regulators to provide a stable and conducive environment for both foreign and local investors.

Last month, The According reported that the total transactions on the local bourse hit N2.35tn at the end of May, indicating a 115.40 per cent increase compared to the first five months of 2023.

Domestic investors maintained their dominance in the market as they transacted about N1.79tn (79.63 per cent) in the five months compared to N458.29bn (20.37 per cent) for foreign investors.