Thursday, November 15, 2018 / 01:10 PM / FDC
Global oil prices (Brent) have averaged $73.07pb in 2018 and remained comfortably above the budget benchmark of $51 per barrel (pb), largely due to high demand and the output-cut led by the Organization of the Petroleum Exporting Countries (OPEC) and its allies. This has ultimately translated to stronger external buffers with gross external reserves peaking at $47.87bn in May.
The robust reserves supported the CBN’s interventionist strategy as the apex bank maintained its sterilized interventions, resulting in the naira has trading relatively stable so far in 2018. In the month of October, the currency traded flat at N362/$ at the parallel market. However, speculative pressures have intensified against the naira due to policy and political uncertainty in the build up to the general elections. As a result, the naira depreciated to N363/$ on November 8.
Uncertainty weighs on forex market
Typically, foreign investors are more risk averse towards countries in an electoral cycle. In addition, they are now also concerned about the high handedness or perceived targeting of MTN Nigeria by the administration. They fear that what is happening to MTN could also befall other multinationals operating in Nigeria. This has increased the unease and outward flows of hedge funds and portfolio investors, supporting the depletion of external reserves.
The external reserves have declined consistently since the peak in May and are now currently below the psychological threshold of $42bn. The sustained decline can also be attributed to the effects of monetary policy normalization in the advanced economies, which has resulted in increased capital outflows. Thus, exchange rate pressures have intensified with naira put contracts selling as high as N365/$ at the IEFX window. It is worth stating that the IEFX window is a better reflection of market reality than the official rate and thus suggests that the naira is likely to depreciate further in the near term.
CBN sustains forex interventions
Meanwhile, the sustained downward trend in external reserves coupled with the decline in oil prices cast doubts about the CBN’s ability to sustain its forex interventions. The CBN has intervened with a total of $547.16mn so far in November. This is 27.45% below a total of $754.15mn sold in the first two weeks of October and 63.76% below the total forex interventions in October.
The CBN recently disclosed that it remains committed to maintaining exchange rate stability and is prepared to achieve this at the expense of external reserves. In light of this, we expect the CBN to continue its interventionist strategy. Nonetheless, the naira is likely to depreciate slightly in the in the near term as manufacturers and retailers continue to build inventories ahead of the festive season.