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FOREX reserves down to $35.67b

FOREX reserves down to $35.67b

18 October, 2020

By Taofik Salako, Deputy Group Business Editor

 

Nigeria’s foreign exchange (Forex) reserves dropped by $42.61 million to close weekend at $35.67 billion amid concerns that the naira may weaken further in the period ahead despite relative stability in recent days.

The naira closed weekend with mixed performance, largely trending on the downside. Central Bank of Nigeria’s (CBN) spot rate remained unchanged at N379/$.

Also, at the official Investors & Exporters (I & E) window, naira closed flat at N385.83/$. At the parallel market, it, however, depreciated to N462/$. Activities at the I & E window increased by 18.9 per cent to $512.8 million last week as against $431.2 million recorded two weeks ago.

In the forwards market, naira weakened across the various instruments. The three-month forwards contract depreciated by 0.1 per cent to N388.19/$, six-month contract dropped by 0.4 per cent to N391.30/$ while the one-year contract depreciated by 0.7 per cent to N400.25/$. Meanwhile, the one-month contract was flat at N386.50/$.

Senior Research Analyst, FXTM, Lukman Otunuga said the future of naira remains uncertain with disruptions in global crude oil market and the constricted domestic economy expected to modulate foreign exchange (forex) reserves, the linchpin of the Central Bank of Nigeria’s (CBN) controlled forex rate management.

According to him, given how the fundamental themes weighing on oil remain intact, the commodity may struggle to push higher, which is bad news for emerging market oil producers like Nigeria.

“It has been the same old themes punishing the naira over the past few years. From multiple exchanges, to depressed oil prices, shaky economic conditions, dollar scarcity and the new addition COVID-19. With Africa’s largest economy still healing burns inflicted by the coronavirus menace, the Naira is likely to remain depressed in the near term,” Otunuga said.

Analysts at Cordros Capital said the decline in forex reserves was due to disproportionate outflows relative to inflows.

In its weekend review, Cordros Capital noted that despite CBN’s commitment towards exchange rate unification, there is still legroom for naira to depreciate further in the medium-to-long term.

According to analysts, factors that could further dampen the naira include the widening current account (CA) position, currency mispricing, which could induce speculative attacks on the naira, and the resumption of forex sales to the Bureau de Change (BDC) segment of the market which should place an additional layer of pressure on the reserves.

Otunuga noted that with more than 90 per cent of forex earnings from oil sales and about 70 per cent of government revenues, Nigerian currency management remains complicated.

“Given how this directly impacts foreign exchange reserves, this complicates the Central Bank of Nigeria’s efforts to defend the Naira against external and domestic risks,” Otunuga said.

Analysts at Afrinvest securities said they expected the exchange rates to remain range-bound at the official market and the I & E window.

Afrinvest Securities had earlier noted that there were still severe foreign exchange and fiscal risks that show less optimistic view of the Nigerian economy.

According to analysts, while potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices, the slow and uneven recovery in global oil demand is also expected to linger till the end of 2021, implying that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geo-political tensions.

Analysts pointed out that beyond oil and gas exports which only accounts for 35.8 per cent of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce.

“The restrictions on forex demand and the existing forex demand backlog have brought about a significant premium of around N79.0 in the parallel market, which we now consider to be a more market-reflective segment,” Afrinvest Securities stated.

 

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