Foreign Reserves Remain Pressured

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Thursday, December 24, 2020 / 01:25 PM / by CSL Research / Header Image Credit: Investopedia

 

Over the past few months, severe pressure has been mounting on the country's foreign reserves in face of dwindling oil earnings and reduced capital inflows from risk averse foreign investors. The decline in oil prices was largely driven by weakened crude oil demand (linked to the global pandemic and oil price war between Russia and Saudi Arabia). The external reserves has been oscillating around US$33-39bn for the past 11 months.  At the beginning of the year, the country's foreign reserves stood at US$38.5bn and fell to US$35.36bn as of 23 December 2020. 

 

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 Central Bank of Nigeria (CBN) to limit interventions in various windows. This led to a spike in the exchange rate at the parallel market, the I&E window rate was devalued once while the official exchange rate was devalued twice. However, in a bid to improve liquidity in the parallel market and reduce pressures on the nation's FX reserves, the Apex bank recently issued a new policy on remittance inflows from Nigerians in Diaspora into the country aimed at boosting remittance inflows. Yesterday, the Naira exchanged at the parallel market at c.NGN476.00/US$ compared with N392.00/US$ at the I&E window.


 

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Going forward, we do not expect any significant growth in reserves in the short to medium term save from any form of USD debt issuance and effectiveness of the Covid-19 vaccines, which can aid oil price recovery. Also, OMO maturities for Q1 2021 stands at c.N4.1tn of which FPIs (who would prefer to repatriate their funds considering low interest rates) own majority of the maturities. The Central Bank of Nigeria forecasts further pressure on the external reserves as worsening current account balance, decline in oil price, and risk aversion on the part of investors which continue to affect capital inflows remain major risks.


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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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