Godwin Emefiele, CBN Governor

…as CBN adopts strategies to curtail slide

By JULIUS ALAGBE

The continuing slide in the level of the country’s foreign reserves is raising fresh anxiety over the possibility of an unrestrained defence of the naira in the near future. Some experts have expressed concern over the rate of depletion of the reserves which may have dropped by almost $10 billion in the past one year.

The foreign reserves are the barometer used by other countries and the multilateral financial agencies to determine the credit balance of any country. The minimum reserves requirement is about three months credit balance since all international trades are done through letters of credit, which are promissory notes guaranteed by the central bank. In other words, the reserves should be able to cover three months of trade credit of the country.

However, analysts have expressed anxiety about continuing fall of the nation’s gross external reserves which has dropped further to $37.3 billion as at Friday. The persistent decline may jeopardise the apex bank’s stance on foreign exchange market intervention. Recent reports showed that the Central Bank of Nigeria, CBN, in pursuit of its resolve to defend the naira has expended about $42 billion in the past 15 months to shore up the stability of the naira.

In a note, analysts at WSTC Securities highlighted that the external reserves are edging closer to the CBN’s resistance level of $35 billion. As such, analysts said they are expecting the Central Bank of Nigeria (CBN) to redirect policy toward ensuring a build-up in external reserves to avoid any precipitate action that may dislocate the economy.

They stated that the current level of funding the forex market may be unsustainable without further depletion of the reserves, which will, in turn, lead to a potential threat to the stability of the naira. Available data show that the external reserves have been on spiral decline since last year, as it dropped from $47 billion to $37 billion and by more than $1 billion in 2020. Analysts attribute the decline to lack of strong dollar inflow into the country.

The latest figure on the CBN website reveals downward trends of the balance credited in the external account since the second half of fiscal year 2019. BusinessHallmark gathered that on 31st December 2019 total external reserve was $38.595 billion.

In separate reactions, analysts think there is need to worry as the CBN would be in the market in the week for foreign exchange intervention. The consensus estimate among currency analysts is that external balance would nosedive further until government policy direction is fine-tuned. However, the external account has not reach stop point, analysts said, but there is concern that given the challenges in the external economy especially the price of oil there could problems in the new future.

BusinessHallmark also gathered that while outflow of the foreign currency is sure, where the next inflow would come from remains uncertain. Though analysts recognise increased inflow in the fourth quarter of 2019, future outlook portends grave danger.

At analysts forum held at the weekend in Lagos, analysts said weak inflow and high usage of dollar balance in the nation’s external reserve have contributed to decline in the external buffer for defending the Nigeria’s local currency, naira.

“We believe that the Central Bank of Nigeria will direct policies towards the accretion of the external reserves to keep exchange rate stable”, WSTC analysts at the firm predicted.

Since its peak point at about $47 billion in 2019, the external reserve has been on persistent decline. Gross external reserve stood at $38.01 billion as at the end of January. However, some part of the external account is blocked leaving $37.243 billion liquid assets for use.

Many Broadstreet currency traders predict a further decline this month as the CBN intervenes in the foreign exchange market to keep naira strong. The CBN recently reiterate it stand on currency stability by using multi-tiered foreign exchange strategy in managing naira exposure. The apex bank said it would support the local currency as it ruled out possible devaluation as predicted by some analysts.

Currency traders believe that naira is overvalued, predicting that the currency may be devalued as decline in external reserve is expected to reduce the ability of the apex bank to support the currency for long. In its analysts note, WSTC Securities observed that the FX market was stable during the period, as continued CBN intervention held sway for the exchange rate.

The exchange rate in the Investors & Exporters window stood at an average of N363/$.

Meanwhile, analysts at Coronation held that foreign investment portfolio for the month of January was reported at $1.71 billion, 30% year on year increase. FPI flows averaged N0.54 billion per month in the fourth quarter of the fiscal year 2019. This increase is positive in that there is a renewed appetite for the CBN’s OMO Bills by foreign investors.

“Although the CBN published foreign reserves shed 1.24% in January, there may be no cause to worry just yet if FPI flows are sustained at the current level”, Coronation said.

In its outlook for the foreign exchange market for 2020, analysts at Vetiva Capital stated that lower recourse to reserves will stabilize exchange rate in 2020.

Nigeria’s liquid reserves averaged $42.5 billion in 2019, moving from $43.1 billion as at end of December 2018 to $45.1 billion by end of June 2019, due to improved domestic oil production and favourable oil prices at average $66 per barrel during the period.

Lower average crude oil prices in second half of 2019 was $61 per barrel, FPI exits and speculator demand saw reserves fall by $3.0 billion to $39.0 billion by December with an average daily decline of $50.7 million in the second half of 2019.

Analysts at Vetiva capital said: “We expect reserves to hover around the $38.0 billion mark in 2020, due to stable outlook for crude oil production and improved FPI flows. But the devastating effect of Coronavirus on global trade and particularly China’s businesses which are the major drivers of crude oil imports seems to negate these projections. Since late January the price has dropped from over $65 per barrel to about $50.

The CBN also reduced its recourse to reserves in 2020, as interventions by the apex bank at the NAFEX window in 2019 year to date declined by 51.8% y/y to $4.6 billion (2018 – $9.4 billion) from a total supply of $31.0 billion (2018 – $33.4 billion).

“Given our expectations for stability in reserves in 2020, we do not expect the CBN to supply more than $5.0 billion at the NAFEX window with improved portfolio flows expected to provide the bulk of supply”, they said.

Analysts at Meristem said reserves, however, began a free fall in the second half of the year, reaching a low point in December due to declining oil receipts, increased capital flight and the aggressive FX interventions by the CBN to defend the currency.

“In the final quarter of 2019 alone, the reserve position lost at least USD3.17 billion. The resolve of the CBN to continue its policy of interventions in the FX market and hence, the stability of the Naira is anchored on the external reserves position of the country.

“The Central Bank Governor had said in the past that this policy stance will not change unless the external reserves and crude oil price fall below USD30 billion and USD30 per barrel”.

However, analysts added that making the OMO market the exclusive preserve of foreign investors has been lauded as a further step to maintain FX liquidity and the stability of the exchange rate.

To keep naira strong, analysts at Meristem Securities expect the FX intervention to continue at least till first half of 2020 after which the state of crude oil prices and the external reserve position will test the resolve of the bank to continue its defence of the naira.

“If these hold true to the stated thresholds, the strategy will continue. We expect FX inflows in the form of foreign borrowings, grants and other infrastructure support facilities from multilateral institutions to plug budget deficit to boost the foreign reserves and ease the pressure on the currency”, analysts held.

 

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