Tuesday, October 06, 2020 / 02:25 PM /by CSL Research/ Header Image Credit: Financial Times
Based on excerpts from the CBN's recently published Monetary Credit, Foreign Trade and Exchange Guidelines for Fiscal Years 2020-2021, the CBN has expressed concerns on outlook for the country's external reserve and exchange rate. According to the report, the CBN primarily highlighted the following risks as significant concerns for accumulation in external reserves; worsening current account balance, decline in oil price, and risk aversion on the part of investors which would affect capital inflows. The CBN concluded that these factors combined with speculative activities at the I&E window and BDCs would exert pressure on the exchange rate. Given the aforementioned, CBN estimates that the external reserves would be pressured lower to between US$29.9bn and US$34.3bn by the end of December 2020.
Exchange rate and external reserves have been pressured in 2020 due to decline in oil receipts and mounting capital reversals among FPIs. The CBN has been reluctant to intervene actively in the different segments of the markets following the significant dip in April. Nevertheless, USD loans from IMF (US$3.4bn in April 2020) amidst limited interventions in the FX market has supported accretion in the external reserves in recent months. However, the limited intervention in the various segments of the FX market has led to a backlog of FX demand estimated at US$7bn.
Furthermore, we expect the country to continue running a trade deficit for the rest of the year as oil receipts which accounts for over 70% of export earnings remain weak. Lastly, with huge OMO maturities expected till year end, we expect demand from FPIs who want to repatriate their funds to exert further pressure. That said, we expect the wide premium between the parallel market and I & E window to remain even if the CBN decides to supply the needed FX to clear the backlog of demand.