By Babajide Komolafe
The Naira is set to depreciate to N365 per dollar in the Investors and Exporters (I&E) window before the end of the year following rising demand for dollars which is expected to intensify this week.
Last week the naira continued its downward trend, depreciating by 57 kobo in the I&E window. Data from FMDQ showed that the indicative exchange rate for the window rose for the fifth consecutive weeks to N364.06 per dollar last week from N363.47 per dollar the previous week. This translated to 57 kobo depreciation for the naira as well as its biggest week-on-week depreciation since the first week of August.
Financial Vanguard analysis showed that the naira has been on the downward trend in the I&E window since November 15th when it closed at N362.58 per dollar. Since then, the naira has depreciated by N1.48 kobo against the dollar in the I&E window.
The depreciation is driven by increased demand for dollars due to rising concerns over the six month decline of the nation’s external reserves.
While the downward trend in the external reserves is driven by lower revenue from oil, which accounts for about 90 percent of the nation’s dollar earnings, it is aggravated by increased dollar sales by the CBN in its bid to meet dollar demand by foreign investors exiting the nation’s fixed income market.
Last week the reserves dropped further to $38.969 billion, thus falling below the $39 billion for the first time since 2017.
According to the CBN, the reserves dropped to $38.969 billion on Thursday December 19 from $39.319 billion on Thursday December 12, representing w/w decline of $350 million, the highest since second week of October.
While noting that it is unusual for the naira to depreciate at this timeof the year, analysts at Lagos based Financial Derivatives Company, projected that the demand pressure driving the depreciation will persist this week as the apex bank is expected wind down its activities for the year and hence reduction in forex intervention.
They also noted that the depreciation of the naira at this time of the year vis-a-vis declining reserves implies that country’s external sector vulnerability is worsening.
They said: “Typically in December, the naira appreciates due to inflows from visiting family and friends. However the recent depreciation maybe highlighting a more fundamental problem that Nigeria’s external sector vulnerabilities are worsening. The possibility of a further currency weakness is high especially as the CBN winds down its activities for the year. This means that its forex interventions will reduce and demand pressures will mount.”
On implications of the persistent decline in external reserves, they said: “A continuous depletion of the external reserves would limit CBN intervention in the forex market. It is also one of the indicators that act as a proxy of the health of Nigeria’s external buffers. It could send the wrong signals to those that are monitoring the indicator to determine the strength of the currency.”
N900bn inflow to sustain excess liquidity in interbank market
Meanwhile, the surfeit of excess liquidity in the interbank money market will persist this week courtesy of N900 billion inflow expected from maturing secondary market (Open Market Operations, OMO) treasury bills.
Last week, the interbank money market experienced outflow of N236 billion as the CBN mopped up N229 billion via OMO treasury bills auction, in addition to sales of N7 billion worth of Nigeria Treasury Bills (NTB).
However given the huge excess liquidity in the market, estimated at N914 billion at the beginning of the week, as well as inflow of N58.3 billion from matured TBs, the impact of the outflow on cost of funds was muted.
Data from FMDQ showed that while interest rate on Collateralised (Open Buy Back, OBB) lending etched down by seven basis points (bpts) to 2.21 percent last week from 2.43 percent the previous week, interest rate on Overnight lending rose marginally by 28 bpts to 2.79 percent last week from 3.07 percent the previous week.
Analysts at Zedcrest Capital Limited projected that cost of funds will remain at this level this week in view of the inflow of N900 billion.
“We expect rates to inch up slightly at the start of the coming week, with forex Wholesale and Retail forex debits. Rates should, however, moderate towards the end of the week, as OMO maturities of c.900bn flow into the system”, they stated in their outlook for the week.