Trade Deficit Underscores Depth of Nigeria's FX Issues


Thursday, September 03, 2020 / 07:59 PM /by CardinalStone Research / Header Image Credit: AP News


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Trade balance plunges to historic lows; corroborates depth of FX crisis in Q2 Data from the NBS revealed that the economy experienced its worst trade deficit (N1.8 trillion) in over a decade in the second quarter, partly underscoring the depth of Nigeria's recent currency crisis. The weakness in the trade balance reflected a 45.6% QoQ drop in exports to N2.2 trillion, which offset a 10.7% QoQ fall in imports. Unsurprisingly, export pressures were indicative of lower per barrel crude oil prices (-34.8% QoQ; -51.5% YoY) and weaker oil production (-12.6% QoQ; -10.4% YoY). Though the goods and services balance has historically contributed positively to the current account (save for 2016 recession), the recent plunge in exports effectively compounded pressures from lower FPIs and remittances in the review quarter. The "new normal" sparked by COVID-19 disruptions could see this pattern subsist for most of 2020. This, in our view, could compound Nigeria's BoP difficulties amid lower FPI and remittance flows.


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Foreign investors shunned NGN risks in Q2'20

Given the external vulnerabilities (mostly occasioned by weaker oil economics), providers of short- and long-term capital were expectedly averse to NGN assets in the review quarter. Notably, Q2 capital importation plunged by 78.6% YoY to $1.3 billion, with hot money (c.56.1% of total inflows) collapsing by 90.6% YoY. We expect foreign providers of capital to maintain their risk-off sentiments for the rest of the year given global cautiousness and forecast a 20.0% YoY decline in remittances to $18.8 billion. Our view on the latter is premised on rising unemployment numbers in Europe and North America, both of which typically account for 53.0% of total remittances.


Elsewhere, the drop in FX earnings coincided with the cessation of CBN interventions at the I&E and BDC windows (until recently) and deployment of several dollar demand management measures. The ensuing scarcity culminated in a panic-induced parallel market premium (over the I&E rate of N386/$) that widened to as high as N96/$, as unfilled demand in the official windows flowed into the mostly unregulated black market. The apex bank has, however, recently weighed in via the issuance of circulars aimed at plugging FX leakages from imports and improving export repatriation outcomes. The apex bank also resumed partial dollar sales at both the I&E and BDC windows, subsequently cascading to NGN appreciation at the parallel market.


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FX market reprieve would require more than gradual resumption of sales by CBN

The recent restart of FX sales to BDC operators is in line with the CBN's earlier guidance to recommence supply upon resumption of international travel (billed for September 5th). We expect this move, if sustained, to ease the speculative pressures at the parallel market. However, we assess that the renewed supply to BDCs may fail to catalyze a reversion to pre-COVID-19 levels nor drive full exchange rate unification across various windows. To this point, we first note that CBN's plan to sell a maximum of $10,000 to BDC operators twice a week, amounts to c.$60 million a week (assuming 3000 BDCs) which pales in comparison to the c.$225 million per week sold to BDCs before COVID disruptions. Secondly, latent FX demand from FPIs and manufacturers, in addition to new demand from would-be travelers, may continue to exert currency pressure.


The CBN may decide to increase its volume of sales to this market as travel activities pick up. But to drive exchange rate unification, higher BDC sales may have to be complemented by an improvement in liquidity at the I&E window. Considering CBN's current FX constraints, with FX reserves at between $16-18 billion, after adjusting for FPIs and swap obligations, we believe that Nigeria is unlikely to achieve full FX rate convergence without another currency repricing.


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