(Sundiata Post) – Nigeria’s foreign currency reserves is expected to hit $57 billion by year-end, several analysts and a senior official at the central bank told BusinessDay over the weekend.
That works out to a 29.5 per cent surge from current levels of $44 billion- which compares to South Africa’s $50.5 billion reserve and Egypt’s $38 billion as of end-February 2018.
Higher oil prices, increased foreign portfolio inflows and less CBN interventions in the foreign exchange market are the factors likely to spur reserve accretion, according to the apex bank official.
The movement in foreign reserves matter to foreign investors and currency traders looking out for clues in exchange rate movements.
“Further reserve accretion will keep the naira stable and keep speculators off the market,” said Wale Okunrinboye, who handles fixed income and currency research at the investment arm of Ecobank.
The naira exchanged for N360.15 per US dollar at the I&E window Monday, according to data provided by trading platform, FMDQ. It has averaged N360 in the last five months, helping dollar-exposed businesses plan better.
“A $57 billion external reserve position puts the economy on strong footing going into an election year,” Okunrinboye added, recounting the pains of 2016 when currency speculators took advantage of the country’s weak external reserves to stoke pressure on exchange rates.
Speculative trading in better part of 2016 and early 2017 saw the naira slide to as low as N500 per US dollar at the black market.
The Naira appreciated against the dollar at the parallel FX market to close at N362.00/USD on Monday, while it traded flat at the Interbank FX market at NGN305.75/USD, according to data compiled by BusinessDay.
The creation of the Investor and Exporter window in April 2017, which added to an existing three exchange rate markets, helped the naira find its feet again and has helped the CBN reduce dollar interventions by almost 50 percent and that has seen reserves grow.
Largely dominated by autonomous inflows, over $30 billion has been traded on that window since inception.
Healthy external reserves will also curb foreign exchange inflationary pressure, according to Tajudeen Ibrahim, head of research at Lagos-based investment bank, Chapel Hill Denham.
“It will ensure free flow of trade on the back of dollar liquidity and gives the CBN some leg room to cut rates especially since inflation is also trending downward,” Ibrahim said by phone, optimistic of an increase in reserves this year.
Inflation slowed for the 13th successive month in February, sliding to 14.3 percent, the lowest in two years. Monetary authorities have kept interest rates at a record 14 percent since June 2016 to balance fighting inflation with attracting foreign portfolio investments into stocks and bonds.
The senior source at the apex bank revealed a rate cut is likely to happen in the second quarter of this year.
“A rate cut appears more likely in May, which is in line with the CBN governor’s earlier guidance of a rate cut before July 2018 and we believe 100bps MPR cut is on the cards on sustained inflation moderation, relative FX stability and stronger economic growth in Q1-2018,” said Yvonne Mhango, the sub-Saharan Africa economist at Russia-based investment bank, Renaissance Capital.
Nigeria’s external reserves crashed to a record low of $28 billion in the wake of a sharp downturn in oil prices and production in 2016 that snowballed into the country’s first economic recession in 25 years and capped foreign investment inflows.
Reserves have since rebounded helped by an international bond sale of $3 billion and a jump in oil prices and production levels. Net reserves were at $43.8 billion as of Monday, March 19, according to CBN data.
The government’s plan to sell some $2.5 billion in Eurobonds this year and the outlook for oil prices mean reserves will strengthen even further.
Brent oil sold for $66.15 per barrel Monday, according to Bloomberg data; that is the highest in three years and almost three times the price in 2016.
Rising oil production will also sure to play a part in reserve accretion, having recovered some 50 percent to 1.8 million barrels daily in February, according to OPEC data, from 1.2 million barrels daily in January 2016.
“The benign outlook for oil prices and production favours arguments for reserve accretion,” Ibrahim of Chapel Hill said.
Bismarck Rewane, the chief executive officer at Lagos-based advisory, FDC, holds a different view to movement in external reserves. Rewane contends that the CBN will step up interventions in the second quarter leading to reserves moderation.
(BusinessDay)