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Nigeria’s Foreign Reserves Record Biggest Drop as Dollar Inflow Shrinks






Nigeria’s foreign reserves record the biggest drop in May 2021 to $34.2 billion as investment banking analysts explain that Naira remains overvalued despite the unification of the Central Bank’s (CBN) official and autonomous foreign exchange (NAFEX) rates.



The Nigerian local currency has been struggling to retain value amidst scarce foreign currency inflows into the domestic economy. In a new report, investment banking experts at Chapel Hill Denham Limited said they see room for rates adjustment though not certain about timing.

The investment stated that despite the improved liquidity at the Investors and Exporters window, naira for dollar rate closed flat across the varying segments last week. Specifically, analysts said rates at the Investors and Exporters window and the central bank’s secondary market intervention sales window closed flat at N412 and N380.7 respectively, noted also spike in arbitrage activities in the FX market.

Nigeria’s Foreign Reserves Record Biggest Drop as Dollar Inflow Shrinks
Nigeria’s Foreign Reserves Record Biggest Drop as Dollar Inflow Shrinks

Regardless, dollar transactions at the Investors and Exporters window were consummated for as high as N430 per dollar, Chapel Hill Denham said.

The firm added that average daily turnover at the window more than doubled the prior week’s print at USD$212 million.

Contrarily, the parallel market rate weakened by 2.1% or N5.0 week on week to N495.00/$ as arbitrage activities increased at the black market.

Chapel Hill Denham said, the nation’s gross external reserves suffered its biggest monthly decline since February. Gross external reserves dipped by USD$634.9 million, representing a 1.8% drop to USD$34.2 billion.

“Although the CBN governor had confirmed the unification of the I&E window rate and the official rate at the last MPC meeting, in our view, we think this will offer little or no succour to the ailing FX reserves”, the investment experts stated.

“Despite the unification of the Investors and Exporters window rates and the CBN official rate, we reiterate our view that the regulator would have to engineer further adjustments in the NAFEX rate to resolve the liquidity challenges facing the market”.

More so, from a fundamental stance, Chapel Hill Denham said the Naira remains overvalued based on Reel Effective Exchange Rate (REER), trading nearly 10% above its long-run level. “However, while we see scope for adjustments, the timing remains uncertain”, it added.

In the fixed income market, analysts said there were mixed sentiments last week as investors reacted to the decision of the Monetary Policy Committee (MPC) to hold rates fixed. Investors also reacted to the Nigerian treasury bills (NTB) and open market operations (OMO) auctions that held Wednesday and Thursday respectively.

Thus, yields expanded on the benchmark bond yield curve by an average of 7 basis points week on week to 13.34%, while the NTB and OMO curves also expanded by 38bps and 25bps to 5.78% and 8.88% respectively.

Chapel Hill Denham said interbank funding pressure fluctuated through the week but remained elevated on average as banks continued to access the CBN Standing Lending Financing (SLF) window. Consequently, rates closed the week in double digits.

Last week, the Monetary Policy Committee (MPC) held the benchmark Monetary Policy Rate (MPR) fixed at 11.5%, citing fragile growth as the key consideration.

The asymmetric corridor around the MPR was retained at +100 basis points (bps)/-700bps. The Committee also voted to retain the Cash Reserve Requirement (CRR) at 27.5%, and the liquidity ratio at 30.0%.

Following decision to hold key macroeconomic rates, Godwin Emefiele, the CBN Governor confirmed the convergence of the official exchange rate and the NAFEX rate, stating that government transactions will now be executed at the NAFEX rate.

However, Emefiele expressed the continued monitoring of market development to effectively manage the newly adopted NAFEX rate.

At the NTB auction that held last Wednesday, the CBN auctioned N24.2 billion (91-day), N19.2 billion (181-day) and N19.8 billion (364-day) worth of treasury bills.

Market data showed that 91-day and 181-day bills were significantly undersubscribed as investors displayed a huge appetite for the 364-day bill. The latter was oversubscribed by N266.7 billion.

The auction cleared at 2.5% (91-day), 3.5% (181-day) and 9.65% (364-day). This was similar to the previous stop rates, except for the 364-day which cleared 10bps lower.

“Going into the new week, the National Bureau of Statistics will publish data on capital importation and foreign trade statistics.

“Investors will largely be concerned about the capital importation data which will show the magnitude of Foreign Portfolio Investment (FPIs) into the country. This is a signal of the health of the financial market and could result in the build-up of expectations in the market”, Chapel Hill Denham said.

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