Monday,
March 09, 2020 /09:30 AM / By FBNQuest Research / Header Image
Credit: Rediff
Gross official reserves declined by US$1.71bn in
February to US$36.30bn. This was the ninth successive monthly decline. The
cumulative fall of US$8.82bn is largely due to the exit of foreign portfolio
investors (FPIs), which leads the CBN to sell fx from its reserves. A priority
for the CBN is to keep these players invested in Nigeria, hence the returns
close to 15% available for longer tenor bills within its open market operations
(OMO). Its life would be easier if, like Egypt, it could attract fx inflows from
other sources such as a successful tourism industry and sizeable FDI.
The impact of the softer oil price, both directly and indirectly (via
FPI sentiment), adds to the downward pressure on reserves. Projections from
well-placed oil traders and from international bodies all point to a squeezing
of demand for crude as a result of the coronavirus.
Total reserves at end-February covered 8.5 months of merchandise imports
on the basis of the balance of payments (BoP) for the 12 months to September,
and 4.9 months when we add imported services. For Egypt and its 2018/19 fiscal
year (July-June), the comparable figures were 8.2 and 5.9 months. At these
levels, the cushion is more than adequate in both cases.
The note
attached to S&P's recent rating action suggested that the returns on OMO
bills would remain attractive for FPIs, and that reserves would therefore cover
five months' current account payments (Good Morning Nigeria, 04 March
2020). This measure is a little more challenging because it covers payments on
the income account as well as goods and services.
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Gross official reserves (US$ bn)
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Sources:
CBN; South African Reserve Bank (SARB); Central Bank of Egypt (CBE); FBNQuest
Capital Research |
The Nigerian measure of reserves is gross, covers just fx and excludes
the CBN's swap transactions. Eurobond proceeds flow directly into reserves. Of
the three countries in the chart, South Africa has the fullest definition.
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