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External reserves halt 6-month downward trend, rise to $38.32bn

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…Cost of funds decline to persist amidst N833bn inflow

By Babajide Komolafe

THE nation’s external reserve halted a six months downward trend, as it rose to $38.32 billion last week, the first week-on-week (w/w) increase since July last year.

The development which raises hope of continued exchange rate stability in 2020 saw the external reserves first rising by $53 million to $38.342 billion on Wednesday, January 15, from $38.289 billion on Friday, January 9, the previous week, before dropping to $38.32 billion on Thursday, January 16 last week. This translated to w/w increase of $31 million, the first since July 5 last year.

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After falling persistently for seven months, from peak of $47.989 billion on July 5, 2018, to $42.296 billion February 28, 2019, the reserves commenced steady upward trend which peaked at $45.175 billion on June 10. But, after a four weeks fluctuation which ended on July 5 at $45.149 billion, the reserves commenced a six months downward trend which resulted to $6.83 billion or 8.4 percent decline before the upward trend from January 9, 2010

Financial Vanguard analysis showed that the upward trend recorded last week, was triggered by the 6.3 percent jump in the price of Nigeria’s Bonny Light crude oil, in the first seven days of the month, courtesy of the tension generated by the US killing of Iran’s General Qasem Soleimani, and the latter’s retaliation with missile strikes on two US military bases in Iraq.

Data from the Central bank of Nigeria (CBN) showed that the price of Bonny Light rose by 6.3 percent to $72.18 per barrel on January 7  from $67.91 per barrel on December 31  2019, before dropping to $68.64 per barrel on January 13.

With this development, the naira is expected to maintain its two weeks upward trend this week, even as the CBN sustained its weekly injection of $210 million into the interbank foreign exchange market last week.

Financial Vanguard analysis showed that for the second weeks running the naira appreciated last week in the parallel market and in the Investors and Exporters (I&E) window.

At the I&E window the naira appreciated by 76 kobo as the indicative exchange rate for the window dropped further to N361.84 per dollar last week from N362.6 per dollar the previous week, even as turnover in the window rose sharply by 108.6 percent, w/w, to $1.81 billion.

Similarly, the naira appreciated by 30 kobo in the parallel market last week as the exchange rate in the market dropped to N360.7 per dollar last week from N361 per dollar the previous week.

Projecting that this trend will persist this week, analysts at Afrinvest Limited said:  “n the coming week, we expect the CBN to maintain its foreign exchange stability drive by sustaining interventions.”

Analysts at Cowry Assets Management Limited also projected that, “In the new week, we expect stability of the Naira against the Dollar across the market segments amid increased crude oil prices given the U.S and Iran hostilities.”

Cost of funds decline to persists amidst N833bn inflow

Meanwhile, the decline in cost of funds in the interbank money market last week is expected to persist this week courtesy of expected inflow of N833 billion.

Last week, an upsurge in excess liquidity, prompted by inflow of N586.7 billion from matured treasury bills caused cost of funds to fall, with average short term interbank interest rate falling by 678 basis points (bpts).

Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rate dropped by 671 bpts to 3.0 percent last week from 9.71 percent the previous week.

Similarly, interest rate on Overnight lending dropped by 685 bpts to 3.86 percent last week from 10.71 percent the previous week.

Analysts expects this trend to continue this week due to inflow of N833 billion comprising of N433.8 billion from maturing TBs, N42.1 billion from FGN bond coupon payment and N350 billion from statutory allocation funds to be distributed by the Federation Accounts Allocation Committee (FAAC).

Making this projection, analysts at Zedcrest Capital Limited said: “With FAAC money and OMO maturities flowing in next week, we expect significant demand in Treasury Bills by market participants. We also anticipate the CBN to float OMO auction(s) to mop-up excess liquidity.”

Naira depreciates as turnover rises in forex market

Similarly, analysts at Cordrous Capital said: “In the coming week, inflows worth a combined NGN475.86 billion – FGN Bond coupon payments (N42.10 billion) and OMO maturities (N433.76 billion) – will hit the system on the 20th and 23rd respectively. This, we expect, will boost system liquidity and cause a contraction in the Overnight rate.”


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