Wednesday, February 03, 2016 04:19 PM / FBNQuest Research
Data from the CBN show that official reserves declined by US$910m in January on a 30-day moving average basis to US$28.2bn. The decline over 12 months has amounted to US$6.1bn despite the CBN’s many administrative measures to contain fx demand and some FGN successes in plugging leakages.
Reserves at end-January provided 6.3 months’ cover for annual merchandise imports and 4.6 months when services are included on the basis of CBN data running through to September 2015. This would represent adequate cover in less troubled times but not when the international price of crude oil has fallen by two thirds in just 18 months.
Our take is that the decline will continue in the months ahead unless there is an unexpected recovery in the oil price. The CBN could intensify its administrative measures but would be unlikely to risk steps which jeopardize sensitive imports such as petroleum products.
Rather than take such steps, we suspect that the CBN/MPC will opt for a devaluation this year while maintaining a managed exchange-rate regime. This would make life a little easier for the FGN in the sense that it would highlight the direct connection between the slowdown in the economy and the external trigger for the devaluation (the collapse in the oil price).
The devaluation would not dramatically increase fx supply, particularly if the adjustment was small (as we would expect). At best, it would bring a modest rise in non-oil export values and portfolio inflows, the drawdown of more domiciliary accounts and the re-entry of some unrecorded capital.
8. A modest decline in reserves – May 07, 2015
9. A further sharp decline in reserves – May 05, 2015