External reserves may hit 6 month low in September

Posted by Larry Nwabuoku on 2019-09-08 20:56:00 | Views: 3 |

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External reserves may hit 6 month low in September

By Babajide Komolafe

As weekly decline rises by 80%
Naira appreciates as CBN sustains intervention

THERE are indications that the nation’s external reserves will fall below $41.5 billion at the end of this month, the lowest in six months.

Last week, the persistent decline in the reserves worsened as the week-on-week decline rose by 80 percent to $529 million from an average of $293.5 million in August.

Data from the Central Bank of Nigeria, CBN, shows that the reserve dropped to $43.144 billion on Thursday, September 5, 2019  from $43.673 billion on Thursday, August 29, 2019, indicating a decline of $529 billion, or 80 percent week-on-week.

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Analysts believe this trend would persist at least in the short term pending a significant positive shift in the nation’s macroeconomic fundamentals, and consequently, the reserves will close the month at $41.24 billion, the lowest in six months since February.

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After seven months of persistent decline from a peak of $47.989 on July 5, 2018, the reserves enjoyed steady upward trend from $41.2 billion on February 28, 2019. The upward trend peaked at $45.175 billion on June 10, 2019, and subsequently began a trend reversal till date.

Financial Vanguard analysis show that the reserves have fallen by $2.031 billion between June 10, 2019 and September 5, 2019. The persistent decline is driven by increased dollar sales by the CBN in its bid to defend the naira in the face of huge dollar demand by foreign portfolio investors, FPIs, exiting the nation’s fixed income market.

The decline is aggravated by declining dollar supply from FPIs due to decline in yields on the nation’s fixed income instrument, as well as apprehension over risk of Naira depreciation fuelled by declining price of crude oil, which accounts for 80 percent of the nation’s foreign exchange earnings.

Commenting on this in his review of the foreign exchange market in August, Bismarck Rewane, Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, said: “Many FPIs rushed out of the door as fears of forex restrictions send jitters down their spines”.

Analysts at United Capital Plc and Afrinvest Plc noted that the continued volatility in the crude oil market poses risk of further decline in the nation’s external reserve.

“With the current volatility in the oil market, near-term pressures will still exist on Nigeria’s reserves,” said analysts at United Capital Plc.

“The prospect for accretion in reserves remains weak as oil prices slightly moderated to $60.01 per barrel from $61.04 per barrel last week”, said Afrinvest analysts.

Naira appreciates as CBN sustains intervention

Meanwhile the naira appreciated in the parallel market and in the Investors and Exporters, I&E, window last week even as the CBN sustained its weekly intervention in the interbank foreign exchange market.

The CBN on Tuesday injected $210 million into the interbank foreign exchange market. It allocated $100 million to the wholesale segment, $55 million to the SME window and $55 million to meet demand for invisibles such as Personal Travel Allowance, Business Travel Allowance and Medical bills payment.

This in addition to the $60,000 direct sale to each of the 5,000 bureaux de change, BDCs, across the country caused the parallel market exchange rate to drop to N358.2 per dollar last week from N358.8 per dollar the previous week, indicating 50 kobo depreciation for the naira.

The naira also appreciated by 85 kobo in the I&E window as the indicative exchange rate dropped to N362.08 per dollar from N362.93 per dollar the previous week.

But the volume of dollars traded (turnover) in the window fell by 33.4 percent to $1.1 billion last week from $1.6 billion the previous week. Analysts were, however, divided in their outlook for the naira this week.

While analysts at Cowry Asset Management Limited, projected depreciation of the naira due to impact of declining reserves, analysts at Afrinvest opined that the naira will remain stable due to the continued intervention of the CBN.

“In the new week, we expect depreciation  of the naira against the dollar across the market segments amid  decreasing  external reserves, said analysts at Cowry Assets.

On their part analysts at Afrinvest said: “In the coming week, we expect the exchange rate in the various FX segments to be stable at current levels as the CBN continues to support the naira through its weekly interventions.”

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