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