Thursday, May 07, 2020 / 09:13
AM / by FBNQuest Research / Header Image Credit: PulseNG
Nigeria's overdependence on the oil market for its fx receipts exposes its foreign exchange market to oil price volatility. Prior to the steady decline in oil prices, partly triggered by Covid-19, the principal reason for the trend decline in the country's external reserves has been the exit of foreign portfolio investors (FPIs). This trend is yet to be reversed and likely to continue in the near term. In March the CBN tweaked its fx policy in what President Buhari termed a "realignment". The exchange rates in operation have experienced adjustments. The CBN's interbank/official rate (for priority transactions) is currently N361/US$. This compares with N385/US$ at the Investors' and Exporters' (I&E) window.
Oil receipts (including oil related taxes) contribute to external reserves. The crude oil price averaged US$27/b in April, compared with US$35/b in March. In an attempt to manage fx supply, oil companies (international and domestic) and all related companies (oil servicing) have been directed to sell fx to the CBN and no longer to the NNPC.
The I&E window now relies heavily on local sources for its fx supply. Based on data from FMDQ, fx inflows amounted to US$459m in April. FPIs accounted for just 15% of the total inflow while non-bank corporates accounted for 61% (US$281m) at the I&E window. The CBN made no injections into this window in April.
The halt to the CBN's fx interventions at the I&E window has contributed to a fx shortage, so FPIs have struggled to exit the market. We understand that the backlog/pipeline (largely demand by FPIs) is in excess of US$1bn.
The CBN provides fx liquidity through other interventions. For instance, its secondary market intervention sales (SMIS), wholesale and retail combined, totalled an estimated US$2.9bn in Q1 2020, compared with US$3.2bn in Q4 2019. In April there was no intervention via the SMIS wholesale window as the CBN halted sales following the Covid-19 outbreak.
Through the CBN's Chinese yuan interventions, mainly geared towards manufacturers, an estimated CNY117.5m (US$16m) was injected into the market in Q1 2020. Trade activity has been disrupted due to lockdowns and restrictions on movement in both Nigeria and China. However, it is likely that businesses are making payments on previously opened yuan-denominated letters of credit.
The fx rate on the parallel market has depreciated steadily over the past few weeks. Based on our channel checks, the rate hit as high as N450/ US$ on the parallel market last week. The CBN has recently resumed fx sales for invisibles and SME segments on a modest scale, thereby helping to ease fx demand pressure on the parallel market and resulting in some appreciation of the naira.
Last week, the IMF approved US$3.4bn emergency funding for Nigeria. We assume that some of the recently banked funds will be channelled to the fx market to ease pent-up demand. However, we expect a larger proportion to be used for fiscal measures to combat the Covid-19 pandemic.