Nigeria's FX reserve has continued its decline over the last few weeks and is currently at US$33.6bn, the lowest in 13 months. While this could reflect the lagged effects of the higher oil prices, as Nigeria's crude oil receipts are not spot delivered, we think that the resumptions of CBN's interventions at both the spot and forward markets in April must have increased pressure on the reserve. Beyond this, there are speculations that the surge in Covid-19 cases in India (one of the biggest buyers of Nigerian crude) must have affected demand for Nigeria's crude oil, although there are no official numbers to back up this claim.
Going by government estimates for foreign financing in the 2021 budget of N2.3trn (US$5.6bn), foreign commercial borrowing is likely inevitable. We expect Nigeria to raise between US$4.0-5.0bn this year. For us, we believe the relatively high oil price environment bodes well for a successful Eurobond issuance. Furthermore, foreign investors remain interested in African Eurobond, judging by the recent high subscription rate of 5x of Kenya's Eurobond.
Furthermore, the proposed increased Special Drawing Rights (SDR) allocation by the IMF for its member countries could support reserve accretion. The expectation is that Nigeria's SDR allocation will likely be increased by about US$3.0bn. This could prompt the government to approach the IMF for further RCF-type financing when the allocations are concluded in the third quarter of the year.
Lastly, at an African Investors Conference (AIC) held this week, the CBN stated that the currency is overvalued by about 5-10%, with a fair value between US$430-440. This aligns with our views. Also, it was stated that as of March 2021, the backlog of unmet FX demand by FPIs is estimated at less than US$1.0bn and a framework has been initiated in conjunction with banks to clear the remaining backlog.
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