FX, Still On The FGN's Front Burner

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 Tuesday, January 07,  2020 /09:47 AM / By FBNQuest Research / Header Image Credit: Financial Times


Nigeria's fx market remains firmly placed on the FGN's front burner. The country's heavy appetite for imports and other fx related requirements makes it susceptible to movements in the fx market. Over the past three years, the CBN's fx reforms have resulted in improved fx liquidity. This is evident from the stability of the several exchange rates in operation. The CBN's interbank/official rate (for priority transactions) is currently N307/US$. This compares with N365/US$ at the Investors and Exporters (I&E) window.


Oil receipts (including oil related taxes) contribute directly to external reserves. The crude oil price averaged US$64/b in 2019. In the absence of an oil price crash, we assume that the stability in the fx market will continue.


Foreign portfolio investors (FPIs) contribute indirectly to the external reserves. Over the past quarter, yields have declined significantly due to restrictions on OMO sales to investors as well as CBN's policy on the loan-to-deposit ratio (LDR).


For the latter, the CBN increased the LDR of banks to encourage banks to lend to the real sector of the economy. On the back of this policy, banks have reduced their reliance on NTBs and moved towards creating more risk assets.


We noticed that there has been a significant reduction in fx supply from FPIs at the I&E window. Over the past few months, the I&E window has become dependent on local sources (including CBN) for fx inflow. Based on data from FMDQ, fx inflow from FPIs in Q4 amounted to US$1.6bn, accounting for 21% of the total inflow. This is compared with the FPI inflow of US$4.1bn (i.e. 61% of the total) in Q2.


The CBN has supported the fx market by providing liquidity through various interventions. For instance, its secondary market intervention sales (wholesale and retail combined) totalled US$3.3bn in Q3 2019 compared with US$2.4bn in the second quarter of last year.


In addition, through the CBN's Chinese yuan interventions, mainly geared towards manufacturers, CNY139.2m (US$20m) was injected into the market in Q3 2019. To access this segment of the window, the importer's letter of credit must be denominated in Renminbi.


The CBN's sales to SMEs and for invisibles (personal travel allowance inclusive) amounted to US$1.32bn in Q3 2019. In an attempt to remain competitive, some banks were offering a resale rate of N357.50/US$ or N358/US$ compared with the upper limit of N360/US$ prescribed by the CBN.


There are growing concerns around geo-political tensions which have resulted in an uptick in oil prices. This bodes well for Nigeria's fx market. Furthermore, due to the slowing global economy, there is a growing trend towards monetary accommodation in some economies.


In light of this monetary accommodation stance, Nigeria could attract more capital inflows to boost its reserves and maintain exchange rate stability. However, a more conducive macro environment is required.


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