Nigeria’s External Reserves – Beyond The USD46bn Debate

Tuesday, March 13, 2018 /06:25 PM /
Cordros Capital

external reserves have featured frequently on the pages of national dailies and
other media platforms in recent time. Unlike the case in 2015 and 2016, wherein
every headline about the reserves contained such words as “decline”, “drop”,
“fall” etc., the situation thus far in 2018 has been underpinned by “steady
accretion”. Great stuff, no doubt!

Earlier this week, the CBN spokesman, Isaac Okoroafor,
added more colour to the picture, issuing a statement that the reserves had hit
a 5-year high of USD46 billion as at the close of business on Friday, March 9,
2018. Proud of the development, the corporate communications expert took the
news to the Twitter community, where the veracity of the statement became a
subject of debate. It is safer to conclude that the reported figure refers to
the actual number for the referenced date, hence the variation from the
available data on the central bank’s website which captures the 30-day moving average
of the reserves. Well, that is not the crux of this note.

Proshare Nigeria Pvt. Ltd.
Source: CBN, Cordros Research estimates

whatever perspective, the external reserves is growing, thanks to (1) rising
oil earnings (higher oil prices and production volume have been supportive),
(2) strengthening foreign portfolio inflows, catalyzed by the stable operations
of the I&E FX window, (3) proceeds from external borrowings (recall the
USD2.5 billion Eurobond that was issued last month, (4) slower pace of CBN
intervention in the currency market (USD1.45 billion monthly average thus far
this year, compared to circa USD2 billion monthly average within March-May
2017), (5) the apex bank’s continued efforts at discouraging unnecessary
imports, and to be fair (6) decent inflows from non-oil exports. Clearly, the
monetary authority is walking the talk of deliberating growing the foreign reserves
– which it expects to hit USD60 billion in 2019 under prevailing anchors.

Proshare Nigeria Pvt. Ltd.
Source: CBN, Cordros Research

base case outlook scenario – as highlighted in our Nigeria 2018 Outlook report
“Looking Beneath the Surface” – for the naira in 2018 assumes an external
reserves position of USD47 billion (on a 30-day moving average basis). We were
of the view that under this scenario, the CBN is unlikely to implement material
changes to its FX policy, and forecast the local currency will hover around
NGN360-NGN365/USD and NGN363-NGN368/USD in the I&E FX window and parallel
market respectively. But at the current run rate of average cumulative monthly
growth of 4.84%, we estimate the reserves to hit our forecasted target during
H1-18, thus making the case for our 2018 best case reserve projection of USD56
billion, at which level we expect the central bank to adopt more market
friendly FX reforms. The big question then is “will the naira reflect the steady
accretion to the reserves by way of notable appreciation”?

Proshare Nigeria Pvt. Ltd.
CBN, Cordros Research

Proshare Nigeria Pvt. Ltd.
Source: CBN, Cordros Research

expectation is for the LCY to strengthen to NGN340/USD and NGN345/USD in the
I&E FX window and parallel market respectively, under a USD56 billion
external reserves. For that to happen, we highlighted the following conditions
(1) stable oil price and domestic production continue to impact on trade
balance, (2) the FGN raises the USD portion of the proposed borrowings for the
fiscal year to fund the deficit in the budget, and (3) investors’ confidence in
the I&E FX window strengthens amid sustained economic growth and further FX
reforms, thereby bolstering portfolio inflows. Are the aforementioned
conditions likely? Our answer is in the affirmative. However, we reckon the
above-mentioned as a necessary condition for NGN appreciation. A sufficient
condition will be more direct efforts by the central bank to increase the
volume of USD supplied (we estimate at an average of USD2.5-USD3 billion
monthly, from current average of USD1.4 billion) at its frequent interventions.
Such move, in our view, should help channel a proportion of parallel market
demand to the official window. For instance, we are aware manufacturers still
get less than 50% of their total legitimate FX needs via the official window
while the balance is sourced at alternative sources.

That said, we note recent indications from the CBN
governor that there is a deliberate attempt by the bank to keep the naira
exchange rate in the I&E FX window at current levels. In our view, the aim
of that is to (1) keep local assets attractive to foreign investors and further
support the CBN’s efforts at growing the reserves, and perhaps (2) further
stimulate exports. The possibility of that stance changing anytime soon remains
to be seen, particularly amid the non-confirmation of nominees to the Monetary
Policy Committee (MPC) by the National Assembly – which has made it difficult
for the Committee to meet, as it cannot form a quorum. More so, the CBN chief
appears to have achieved his desired level of exchange rates convergence in the
economy, hinting that, the fact that most transactions are being settled around
the NGN360/USD levels suggests rates unification.

the rest of 2018, we weigh political-related risks to the stability of the
naira as modest. While we do not totally rule out the likelihood of (1) a
number of foreign investors staying on the sideline towards the final quarter
of the year, as the race for the 2019 general elections gathers momentum, and
(2) increased naira liquidity – on election-related spending – increasing
demand for the dollar, we see the apex bank in a comfortable position to
continue its support for the LCY via its interventions in the currency markets.
That will bode well for the business environment (particularly manufacturers,
service providers, and traders) and investing community. By implication, we
look for healthy activities in the equities market and fixed income space.


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