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Tuesday, 16 January 2018

Nigeria 2018 Outlook: Currency, external reserves and capital flows

Thanks to the introduction of the Investor & Exporter forex window, stability in the currency market has been restored. Image result for dollars
The spread between the official and parallel market rate fell from ±200 naira/$ by Dec 2016 to ±5.00 naira/$ by Dec 2017. 
Going into 2018, we argue that the currency market stability will be maintained amid sustained accretion to external reserves and rising oil prices. 
We expect external reserves, which dramatically rose from $23.9 billion in Oct 2016 to $38.2 billion in Dec 2017, to rise above $40.0 billion in 2017. 
Also, Oil proceeds should also improve, driven by higher prices and domestic output stability. However, we note that the sustained influx of Foreign Portfolio Investors (FPIs) into Nigeria at the expense of Foreign Direct Investments (FDIs) is a downside risk if another round of oil shock comes through, especially in H2-18. 
FPIs can also respond negatively to policy inconsistencies and political uncertainties. 
To guarantee net capital inflows and limit vulnerability to external shocks, we suggest a further review of the multiple FX regimes. 
Consequently, our outlook on the currency market, the flow of funds and movement of external reserves is medium-term stable amid positive oil market outlook, rising external buffer and supportive policy environment. 
(C) United Capital Plc Research 

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