FX Rationing to Persist on Low Inflows, Rising Outflows –NOVA
Foreign Exchange (FX) rationing is expected to persist due to low foreign inflows, and rising outflow of the greenback amidst weak external reserves.
Nova Merchant Bank Limited revealed this in its recent macroeconomic research note made available to MarketForces Africa.
The Merchant bank hinted that the Central Bank of Nigeria’s intervention across segments of the FX market improved in the month of October.
However, NOVA explained that with further moderation in interest rate and rising inflation, its modelled interest rate-inflation differential increased in favour of the U.S, expanding the Naira overvaluation.
FX data shows that total intervention sales rose 25% in October to $1.9 billion from $1.5 billion in September, albeit below the average of $2.0 billion over Q1 2020 when inflows moderated the level of interventions.
CBN sales to the SMEs, Invisibles and SMIS (retail and wholesale) segments totaled $540 million compared to $400 million in September.
NOVA explained that non-auction sales increased to $535 million compared to $407 million in September.
Notwithstanding the higher sales, it was observed that the gross external reserves depleted marginally to adjusted level of $35.54 billion from $35.59 billion in September.
This adjustment followed modestly higher crude oil prices in the third quarter (Q3) relative to Q2, according to NOVA.
Analysts stated that even with the higher sales in the month of October, the BDC-Interbank premium still widened to 20.2% from 19% at the end of September with the parallel market exchange rate depreciating to N459.9/$ (average for October from N455.9/$ in September)
NOVA said the CBN remained a net supplier at the IEW to the tune of $259 million following increase in outflows by 22% to $896 million.
“While local FX supplies (exporters, individuals and non-bank financial institutions) provided some support (increasing 18% MoM to $484 million), the paucity of foreign inflows persists (at just $122 million in October)”, NOVA remarked.
The foreign and local (ex-CBN) FX supply combined only accounted for 68% of the total outflows during the month.
The market recorded a net deficit of $289 million, thus necessitated the CBN net supply of $259 million.
It explained that the CBN remained a net supplier at the IEW to the tune of $259 million following increase in outflows by 22% to $896 million.
NOVA said over-the –counter (OTC) foreign exchange futures market activity slowed in the month of October, with total value traded reducing to $246.52 million compared to $393.58 million in September.
Futures contract worth $1.48 billion matured on October 28, 2020 compared to the rate at initiation of N365.5/$, the national autonomous foreign exchange (NAFEX) rate on the settlement date averaged N388.9/$ with a total counterparty settlement gain/loss of N34.7 billion.
“With foreign portfolio inflows expected to remain meagre for the rest of the year, amidst still below $50/barrel crude oil price, we expect the CBN to continue to manage its dollar supply”, NOVA said.
Particularly, the Merchant Bank expects FX supply for foreign portfolio investors (FPI) repatriation to remain lower than the required demand with such funds continually dominating demand at primary market fixed income auctions.
“Coupled with our modelled FX sales to BDCs of $790 million over the next 2 months and sales across other segments, we expect the gross foreign exchange reserve to close the year at $34.06 billion on our base scenario and $35.05 billion on our best-case scenario”, the firm estimated.
However, NOVA added that adjusting the reserve position for expected foreign borrowing of $2.11 billion, could result in a corresponding increase in both its base and best-case scenarios.
“With further moderation in interest rate and rising inflation, our modelled interest rate-inflation differential increased in favour of the U.S, expanding the Naira overvaluation”, the Merchant Bank stated.
“Overlaying the widening inflation-interest rates differential on our purchasing power parity model, the fundamental value of naira lies between N414.7/$ and $431.6/$ (7% – 10.5% overvaluation from current NAFEX rate of N386/$).
“Notwithstanding our fundamental assessment of the optimum exchanger rate, we believe an outright floating of the exchange rate with intermittent intervention to avoid unnecessary speculative attacks will have more meaningful impact”, NOVA stated.
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FX Rationing to Persist on Low Inflows, Rising Outflows –NOVA
