The naira is likely to lose some ground against the dollar in the coming month, as Nigeria’s external reserves cool, limiting the Central Bank’s ability to intervene as aggressively as in the past in the foreign exchange market, analysts say.
Nigeria’s external reserves shed US$540 million in May to US$31.3 billion, after a consistent accretion since October 2016 came to a staggering halt. Even neighboring Egypt’s reserves have now surpassed Nigeria’s for the first time in six years, according to data compiled by BusinessDay.
Bismarck Rewane, CEO of economics consulting firm, Financial Derivatives Company expects the naira to fall to N390 per US dollar in July. The naira gained N1 to close at N367 per dollar on Friday at the parallel market and closed at N373 at the new I&E window.
“Exchange rate appreciation will fade soon,” Rewane said in a presentation at the Lagos Business School, “Reserves are in drip drip drip mode,” and although “oil production revenue of $4 billion is strong,” it is “not enough to stop the demand deluge.”
The CBN’s intervention in the FX market is largely dependent on oil receipts. While there will be an uptick in oil production following a return of the Forcados Terminal- set to add some 300,000 barrels to daily production- oil prices are declining.
Brent crude was down 16 percent to $47 per barrel on Friday, compared to $56 at the start of March. Nigeria’s budget benchmark is $44.5 per barrel.
“The naira outlook is predicated on an oil price of at least $50 per barrel and steady accretion in external reserves,” said Ayo Teriba, CEO of consulting firm, Economic Associates. “Because the CBN has no cover position, if the predication changes the naira is likely to weaken,” Teriba said by phone.
The question now, Teriba added, is if the slump below $50 will be temporary.
Meanwhile, the country’s oil production was at 1.5 million in May, according to OPEC data, and is set to get a lift from the re-opening of the Forcados terminal.
Some analysts argue that Nigeria is more oil-production sensitive than price sensitive and the CBN may sustain interventions given the uptick in production which should make up for a price decline.
An email sent to CBN spokesman Isaac Okarafor, was not replied. Godwin Emefiele, the bank’s governor, vowed to sustain interventions at a press briefing following the announcement of the country’s monetary policy last month.
The CBN has sold in excess of $8 billion year to date (Ytd) in a bid to defend the naira against the dollar.
The apex bank’s quoted rate has hovered at N305 per dollar while the black market rate has since gained about 30 percent since the regulator upped interventions.
Despite the constant interventions, external reserves went on a 7-month gaining streak, adding $6.4 billion since end-October, on the back of improved oil prices and rising production, a disbursement by the African Development Bank, Eurobond sales of US$1.5bn and swap transactions.
“The decline in May is not a cause for alarm against the broader trend,” FBN Quest analysts, Gregory Kronsten and Chinwe Egwim, said in a June 8 note. “If, however, the decline in reserves was repeated over a few months, the CBN would scale back its interventions and rethink its fx policy.”
This first monthly decline since then, can be seen in the context of the acceleration in the CBN’s fx interventions through the several windows it operates, the latest being NAFEX for portfolio investors and exporters.
In what is viewed as tentative steps toward freeing its currency amid economic turmoil caused by lower oil prices and a shortage of dollars, the apex bank introduced a new window for Investors and Exporters- NAFEX- on April 24.
The new window is inspiring investor confidence, the once abandoned Nigerian stocks are rallying again as portfolio inflows trickle in. New-York based Fitch Ratings says the new window has improved liquidity in the banking system.
Source: Bloomberg, BusinessDay
“We see that the early indications from NAFEX are promising. Offshore portfolio investors are accessing the window (on both sides of the trade),” Kronsten and Egwim noted.
“At this point, we are seeing the frontier and Africa-dedicated funds at the window: the more widespread the participation, the less the CBN has to draw upon its reserves.”
Already, the country’s traditional forwards market is facing competition from an upstart based on the new NAFEX window.
Bond investors and speculators are now switching away from non-deliverable forwards that are linked to the main interbank exchange rate, which is tightly controlled by the central bank, and embracing the more liberal pricing mechanism at the new window.
Monetary authorities should devise more means of attracting autonomous capital, according to Teriba.
Nigeria is in its second year of an economic recession. Output collapsed by 0.5 percent in the first three months of this year. The IMF forecasts a 0.8 percent growth this year.
LOLADE AKINMURELE
