Pressure on Reserves, Stability of FX Policy

Forex
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Wednesday, November 14, 2018 / 11:30 AM / FBNQuest Research

 

Today’s chart shows the stability in the fx market since the launch of the CBN’s reforms in Q1 2017. That stability has been maintained by the CBN despite the US$6bn depletion of official reserves since the end of June. The retreat of some foreign portfolio investors (FPIs) in response to US monetary policy explains the fall in reserves, which process has further to run. 

That said, we do not expect major changes to the CBN’s fx policies before the elections, and perhaps not at all next year. In passing, we note that the president and his circle are opposed to changes.                                                                                                                 

Monetary policy is guided by the determination of the CBN to keep FPIs invested in Nigeria, thereby underpinning the naira exchange-rate and stemming the depletion of reserves. 

The FPIs may well find fault with the transparency and mechanisms of the fx market but can live with them, provided that they are confident they can make an exit of their choosing. They will have been comforted by the recovery in the crude price since Q4 2017. 

The depletion of reserves will also be stemmed by the FGN’s forthcoming Eurobond issuance, for which it has begun its roadshow to raise US$2.8bn within its plans for 2018 budget deficit financing.

 

Average exchange rates (NGN per USD)

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Sources: CBN; FBNQuest Capital Research

 

The CBN’s thinking on fx is not static, and two trends should be noted. Since July it has adjusted its daily intervention rate in small increments from N305.70 to N306.70. More significantly, over the same period the rate on NIFEX has moved from around N330 towards the rate on the investors’ and exporters’ window of c. N364. 

It remains our view that the authorities are in no hurry to abandon the CBN’s preferential rate or unify the various windows in operation.


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