New Normal or Fleeting Reality?

Thursday, October 12, 2017 10:28 AM / ARM Research  


As seen in the previous sections, recent plunge
in ‘reserve depletion’ (-90% QoQ to ~$290 million) improved Nigeria’s financial
account and tapered concerns over narrowing CA surplus and naira resilience
over much of Q2 17. Going by latest CBN numbers, the naira again showed
toughness at both the NIFEX and BDC markets over July and August—with
breakdowns suggesting a 4.1% appreciation in the latter relative to Q1 17


At the NAFEX end, naira appreciation extended
further into September (+0.9% MoM to mean of N359.79/$) with daily market
turnover reaching $279 million by mid-month. Consequently, narrower spreads
have reduced the potential for arbitrage transactions. For us, the new-found
strength in the naira reflects sustained CBN dollar injections into various FX
market strata and higher foreign portfolio inflows—with the former tracking
improvements in Q3 17 reserves (+4.8% QoQ at $31.8 billion) that have left net
monthly dollar inflow into the economy printing 21% higher at $3.5 billion
relative to the average over 2016.


No doubt, optimism over the apex bank’s ongoing
FX interventions was aided, to a great degree, by currency-induced collapse in
imports which first became noteworthy in July 2016 (-36% MoM to $2.5
billion—lowest level since February 2009). Precisely, the low base for imports
masked the impact of collapse in reserves over 2016 by flattering import cover
over the last eight months (+54% to ~12 months). That said, foreign appetite
for naira assets was equally boosted by the regulatory mandate directing banks
to quote the floating IEW rate rather than a fixed exchange rate.


This was seen by markets as a move towards a
unified, floating exchange rate. Irrespective, the jury is still out on if the
current naira traction is sustainable. However, from a BoP perspective, our
expectation of continued growth in the financial account—with reserve drawdown
expected to contract further as FPIs and other investments remain
elevated—suggest that the naira would still hold its own in the near term
despite expected decline in CA surplus.


In any case, notwithstanding CBN’s huge FX
injections into the economy5, its net dollar inflow has, thus far, remained
positive (save for the one-off deficit of $936 million in May) even as surging
autonomous dollar supply provides impetus to currency markets amidst recent
premarket initiatives (i.e. gravitation towards synchronized exchange rate for
the country).


Whilst we note that, farther out, currently
rebounding imports could slightly dim the picture—especially from an import
cover perspective, we retain our near-term bullishness on the USD across FX
market strata and bet on it trending around current levels till the end of H1


Proshare Nigeria Pvt. Ltd.


From ARM’s H2 2017 Nigeria
Strategy Report

NSR Q4 2017 (5)
– Balance of Payment to Survive Murky Waters

Q4 2017 (4) – Nigeria’s Net Creditor Status Diminishes Again

NSR Q4 2017 (3)
– Fiscal: Federal Revenue Growth Shows Signs of Life

NSR Q4 2017 (2)
– GDP: Uphill with the Handbrake On

Q4 2017 – Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?


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Global Growth Forecasts

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3.      Sweet Spot for
World Economy Won’t Last Beyond 2018

4.      We Are Faced
With Twin Gluts Globally – Dr. Teriba

5.      Quantitative
Easing and World Growth Buoy Global Rating Outlooks

6.      Nigerian Banks
Sector Update For September 2017: Steadying The Ship

7.      Federal Republic
of Nigeria Ratings Affirmed At ‘B-B’; Outlook Stable

8.     Review of Power
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9.      Nigeria –
Improving Fundamentals Will Relieve Pressure On Naira Peg

10.  Fitch Affirms
Nigeria at ‘B+’; Outlook Negative


Related News from
ARM’s H2 2017 Nigeria Strategy Report

H2 2017 (11) – Monetary Indicators Swamped By Hawkish Dogma

H2 2017 (10) – CBN’s Volte-Face Narrows FX Markets Premium

H2 2017 (9) – Trade Balance to Survive Muddy Waters

H2 2017 (8) – Nigerian GDP: Recovery Signal Speaks

H2 2017 (7) – Nigerian Fiscal: One Step Closer, Several More To Go

H2 2017 (6) – REFORMS: Getting Down to Brass Tacks

H2 2017 (5) – New Regulations set sights on increasing gains for Pension Assets

H2 2017 (4) – Nigeria’s Socio-Political Milieu: Just Before That Sigh of Relief

H2 2017 (3) – Supply Glut Underpins Broadly Bearish Trends Across Soft

10.  Nigeria
Strategy Report H2 2017 (2) – Crude Oil: US Shale Challenges Anticipated Market

11.   After
Bullish Run, Portfolio Flows to EM Look Set To Moderate – Nigeria Strategy
Report H2 2017