Tuesday, November 10, 2020 / 8:44 PM / by NOVA Merchant
Bank / Header Image Credit: TheCable
Dollar Rationing to Persist on Meagre Inflows and Rising
Outflows
The
CBN intervention across segments of the FX market improved in the month of
October, with total intervention sales rising 25% MoM to $1.9 billion from $1.5
billion in September, albeit below the average of $2.0 billion over Q1 2020
when inflows moderated the level of interventions. CBN sales to the SMEs,
Invisibles and SMIS (retail and wholesale) segments totaled $540 million
compared to $400 million in September. Non-auction sales increased to $535
million compared to $407 million in September. Notwithstanding the higher
sales, the gross external reserves depleted marginally to adjusted level of
$35.54 billion from $35.59 billion in September following modestly higher crude
oil prices over Q3 relative to Q2. Even with the higher sales in the month of
October, the BDC-Interbank premium still widened to 20.2% (from 19% at the end
of September) with the parallel market exchange rate depreciating to N459.9/$
(average for October from N455.9/$ in September).
The CBN remained a net supplier at the IEW to the tune of $259 million following increase in outflows by 22% to $896 million. While local FX supplies (exporters, individuals and non-bank financial institutions) provided some support (increasing 18% MoM to $484 million), the paucity of foreign inflows persists (at just $122 million in October). The foreign and local (ex-CBN FX supply combined only accounted for 68%of the total outflows during the month, with the market recording a net deficit of $289 million, which necessitated the CBN net supply of $259 million.
OTC
FX futures market activity slowed in the month of October, with total value
traded reducing to $246.52 million compared to $393.58 million in September.
Futures contract worth $1.48 billion matured on October 28. Compared to the
rate at initiation of N365.5/$, the NAFEX rate on the settlement date averaged
N388.9/$ with a total counterparty settlement gain/loss of N34.7 billion.
With
foreign portfolio inflows expected to remain meagre for the rest of the year,
amidst still below $50/barrel crude oil price, we expect the CBN to continue to
manage its dollar supply. Particularly, we expect the FX supply for FPI
repatriation to remain lower than the required demand with such funds
continually dominating demand at primary market fixed income auctions. Coupled
with our modelled FX sales to BDCs of $790 million over the next 2 months and
sales across other segments, we expect the gross foreign exchange reserve to
close the year at $34.06 billion on our base scenario and $35.05 billion on our
best-case scenario, Adjusting the reserve position for expected foreign
borrowing of $2.11 billion, could result in a corresponding increase in both
our base and best-case scenarios.
With
further moderation in interest rate and rising inflation, our modelled interest
rate-inflation differential increased in favour of the U.S, expanding the Naira
overvaluation. Overlaying the widening inflation-interest rates differential on
our purchasing power parity model, the fundamental value of naira lies between
N414.7/$ and $431.6/$ (7% - 10.5% overvaluation from current NAFEX rate of
N386/$). Notwithstanding our fundamental assessment of the optimum exchanger
rate, we believe an outright floating of the exchange rate with intermittent
intervention to avoid unnecessary speculative attacks will have more meaningful
impact.
Implementation of Higher Electricity Tariff to Elevate End Year
CPI Figures
After
exceeding 1% in April, month-on-month inflation has maintained a constant jump
to reach 1.48% MoM in September. The increase has been largely dominated by
decline in market supplies of farm produce, rising cost of transportation and
FX pass-through to manufactured products. According to FEWSNET, the shortage of
farm produce is largely a result of exacerbated flooding in localized areas of
the Northeast and atypically high staple food prices during the extended lean
season from April/May through the end of September. For transportation cost,
the increase in prices of diesel and PMS (following rising crude oil prices)
contributed to the upsurge in the prices, with a further transmission to higher
prices of transported food items.
With
the persisting higher prices of livestock (up 20% to 30% relative to the
pre-COVID19 period across most markets), staple foods (increased 65% to 120%
between January and May), rising PMS price (+8.3% MoM in September) and FX
pass-through to manufactured products, we expect inflation in the month of
October to deliver same trend as in September. For the month of October, we
expect the consumer price index to expand by 1.53% MoM, with headline YoY
expanding to 14.22%.
Beyond
October, the now implemented upward adjustment in electricity prices effective
November and rising PMS/diesel prices due to increasing global crude oil prices
will add more pressure to inflationary trend over the next two months. On
electricity tariff, we expect the impact to reverberate across industrial and
consumer prices, with the major shock area being the core index which
incorporates Housing Water, Electricity, Gas and Other Fuel (HWEGF). The
combined impact of increases in electricity tariff, rising diesel/PMS prices
and lower than average harvest season will define new levels for inflation in
the next two months. Adjusting our model for the above-mentioned pressures, we
arrived at a base average inflation rate of 13.2% in 2020, compared to average
of 11.4% in 2019.
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