CBN's FX Interventions; Good Cheer But How Sustainable?

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Tuesday, September 08, 2020 03:29 PM / By CSL Research / Header Image Credit: Business Day


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According to reports in the local media, the Central Bank of Nigeria (CBN) has resumed FX sales at the Investors & Exporters window (I&E window) and to Bureau De Change (BDC) operators, supplying US$110m at the different windows of the market as of 4 September. Noticeably, this has led to an improvement in trading activities at the I&E window. Average volume traded in September was US$64.7m as of 7 September which is an increase of 58.5% and 45.0% over July and June's average volume traded of US$40.8m and US$44.6m respectively. In addition, the resumption of sales to BDCs has led to decent strengthening of the naira at the parallel market and BDCs. According to data sourced from Aboki FX, the naira now exchanges at the parallel market for N445/US$ as of 7 September compared with N472/US$ in prior weeks. At the BDCs, the US dollar exchanged for N442 as of 7 September.


We recall that following the pandemic-induced crash in global oil prices and production/demand, Nigeria began to face significant FX shortages which forced the CBN to stop interventions in the various windows. This led to a significant FX demand backlog which is estimated according to media sources to be around US$5bn – US$7bn. In addition, the FX shortages led to a spike in exchange rate at the parallel market, the I&E window rate was devalued once while the official exchange rate has been devalued twice. Thus, news of interventions by the CBN comes as a welcome development for businesses and foreign investors who have remained trapped in the country unable to repatriate their investments.


That said, we remain pessimistic on the ability of the CBN to sustain interventions at the different windows of the Foreign exchange market. Our pessimism is hinged on a number of factors. First, we note that the external reserve position of the CBN is not a significant war chest to sustain market liquidity in the face of dwindling oil earnings. The nation's gross reserves was US$36.2bn (as at 7 September 2020) which is close to pre-2015/2016 FX crisis level of c.US$30.0bn. With oil earnings expected to remain weak in the coming months, we do not expect any significant growth in reserves save from any form of USD debt issuance. In addition, the country's external trade position remains precarious with a trade deficit of N1.8tn (US$4.7bn) recorded in Q2 2020.


Furthermore, we remain concerned about the ability of the CBN to clear the current FX backlog which is about 15% of the country's external reserves according to media reports. Piling further pressure, OMO maturities for the rest of 2020 stands at c.N4.8tn (US$12.4bn) of which FPIs (who would probably prefer to repatriate their funds considering low interest rates) own majority of the maturities. As a result, we expect the naira to weaken and the FX market reflects our expectation with the 1-Year FX futures contract priced at N423.90/US$.


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