July 23, 2018

Nigeria’s external sector comes under pressure as reserves fall

…Forex inflow nosedives to 7 months low
As external reserves fall to 3 months low at $47.4bn
By Babajide Komolafe
THE Investors and Exporters (I&E)window of the Nigerian foreign exchange market is losing steam with foreign exchange (Forex) inflow through the window projected to fall to the lowest level in seven months at the end of this month.


This was triggered by unattractiveness of local debt instruments to foreign portfolio investors due to rise in interest rates and bond yields in advanced  economies particularly the USA,  coupled with the low yields and weak economic recovery in Nigeria.
Financial Vanguard  investigations revealed that average daily forex inflow  through the I&E window has dropped to $83.57 million as against $144.75 million in the first half of 2018,H1’18.
In H1’18, the I&E window attracted inflow of $17.37 billion, translating to monthly average of $2.9billion.  But with the inflow of $1.3billion recorded as at July 19 last week, analysts at FSDH Merchant Bank projected that inflow into the window for the full month will be lower than the monthly average in H1’18.
This view is reinforced by 18 percent decline in turnover last week, which fell to $700 million from $856 million the previous week.
External reserves decline to three months low
Mirroring the development in the I&E window, the nation’s external reserves last week fell for the second consecutive months to the lowest level in three months. Financial Vanguard analysis of data provided by the Central Bank of Nigeria, CBN, showed that the external reserves dropped steadily to $47.416 billion last week Thursday (July 19) from $47.798 billion on Thursday July 5.
Further analysis also revealed that external reserves level of $47.41 represents the lowest in three months, specifically since April 27 when the reserves stood at $47.416 billion. From April 27, the reserves fluctuated due to interplay of increased dollars earnings prompted by rise in crude oil price and increased dollar supply by the CBN in its bid to stabilise the exchange rate amidst increased dollar demand mostly from foreign portfolio exiting the nation’s debt instruments (treasury bills and FGN Bonds).
As result, the external reserves rose from $47.416 billion on April 27  to $47.865 billion on May 10, dropped steadily to $47.425 billion on June 2, picked up again reaching a peak of $47.804 billion on June 25. Thereafter, it declined to $47.775 billion on June 28, from where it rose to another peak of $47.798 billion on July 5, before commencing the current decline.
Analysts were, however, optimistic that notwithstanding the two weeks decline, the external reserves will continue to enjoy accretion in the second half of the year. “The favourable crude oil production in Nigeria and price in the international market should continue to lead to accretion to the external reserves. This should maintain stability in the foreign exchange rate in the short- to-medium term”, said analysts at FSDH Merchant Bank.
Naira appreciates as CBN increased forex injection with Yuan sale
The naira appreciated in the I&E window last week, as the CBN stepped up its weekly foreign exchange intervention, conducting a special Secondary Market Intervention Sale, SMIS, in Yuan, the Chinese currency. In the I&E window, the indicative exchange rate dropped to N361.6 per dollar, from N361.91 per dollar, the previous week, translating to 33 kobo appreciation of the naira.
Foreign exchange injection
The naira was, however, stable at the parallel market, where the exchange rate remained at N358.5 per dollar same as previous week. The appreciation of the naira was enhanced by the sustained foreign exchange injection by the CBN last week.
On Tuesday, the CBN injected $210 million into the interbank foreign exchange market, allocating $100 million to the wholesale segment, $55 million to the SME window, and $55 million for invisibles.
This was followed up on Friday with a special SMIS auction to commence the sale of Chinese Yuan.
Acting Director, Corporate Communication, CBN, Isaac Okorafor, said in a statement that the sales shall be through a combination of spot and short tenored forwards. He added that the exercise, which shall be Special Secondary Market Intervention Sales, SMIS, retail would be dedicated to the payment of Renminbi denominated Letters of Credit for raw materials and machinery and agriculture.
He explained that the CBN would receive bids from all authorized dealers, adding that due to the peculiarity of the exercise, the apex bank would not be applying the relevant provisions of its revised guidelines for the Operation of the Inter-bank Foreign Exchange Market, which direct all SMIS bids to be submitted to the CBN through the Forex Primary Dealers, FXPDs.
He said the CBN would also not be applying the relevant provisions of the guidelines which equally provide that “Spot FX sold to any particular end-user shall not exceed one percent of the overall available funds on offer at each SMIS session”.
N404bn to inflow hit interbank amidst expectation of liquidity mop up
The CBN is expected to further mop up liquidity from the interbank market this week, as inflow of N404 billion from matured treasury bills hit the market. The concomitant excess liquidity may be aggravated by likely inflow of statutory allocation funds this week, following the conclusion of the meeting of the Federation Accounts Allocation Committee, FAAC, with the three tiers of government agreeing to temporarily sheath their swords and share the allocation for May.
In the early part of last week, the interbank money market was awashed with liquidity following inflows of N608.6 billion from matured Open Market Operations, OMO, bills.
The excess liquidity was, however, drained from the market in the later part of the week, courtesy outflows of N603.25 billion comprising primary market TB sales of N107.04 billion and CBN liquidity mop up of N496.25 billion via OMO bills.
The market experienced liquidity pressure on Friday due to outflow for funding for forex auction conducted by the CBN that day.
As a result, cost of funds closed the week higher than previous week. Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 608 basis points (bpts) to 15 percent last week from 8.92 percent the previous week, while interest rate on Overnight lending similarly rose by 625 bpts to 15.67 percent from 9.42 percent this week.
Analysts were, however, hopeful that cost of funds will moderate downwards this week, notwithstanding further liquidity mop up by the CBN in response to the huge liquidity inflow expected during the week. According to analysts at Lagos based Afrinvest Limited, “In the coming week, we believe if the CBN sustains its current pace of OMO auctions, money market rates will trend lower as N404.3 billion    worth of OMO maturities are expected to hit the system.”
Analysts at Cowry Asset Management Limited made similar projection saying, “This week, T-bills worth N404.32 billion will mature via the secondary market amid expectations of OMO sales by CBN to mop up excess liquidity. Howbeit, we expect relative ease in the financial system liquidity with resultant moderation in interbank rates.”