Bleak Future for Naira as Foreign Reserves Tumble
Bleak future for Nigerian local currency, Naira, as foreign reserves tumble by 0.47% or $123 million to close the week as $34 billion despite an uptrend in the global oil market. The lower external reserves would affect the monetary policy authority support for the local currency, analysts said.
The Central Bank (CBN) data shows that the nation’s external reserves tumbled to the lowest since November 2017 on Friday. The reduction was attributed to the CBN stance supporting the local currency.
However, some investment bankers said in their separates report that apex bank FX supply at the Investors and Exporters Window (IEW) has remained weak year to date.
Reports said CBN supply into the window has remained below the pre-pandemic period. Ahead of the lockdown, MarketForces Africa gathered there was an already established FX supply gap in CBN support in the Investors and Exporters Window.
The survival of Nigeria’s local currency depends largely on the prices of oil in the global market. Meanwhile, oil prices have been stable as Brent price crossed $72 per barrel.
The Organisation of Petroleum Exporting Countries and allies (OPEC+) output management influenced the oil market performance significantly in the year 2021 as pressure ease on the global economy.
Goldman Sachs, in a report, holds a bullish view on the oil market, saying prices will hit $80 per barrel in the year.
The CBN quoted on its website that oil peaked at $80 per barrel on June 2, 2021.
Despite the oil market rally, Nigeria’s external reserves still remain dry, some analysts attributed this to lower supply volume into the oil market amidst the OPEC+ quota.
At a recently concluded meeting, OPEC+ affirmed the group decision to incrementally increase output which is expected to raise Nigeria’s supply in the market.
OPEC+ remains bullish on demand outlook not minding the Iranian supply threat following talks with the United States on the nuclear deal. In 2021, Nigeria’s oil output was affected by the OPEC+ quota that pegged supply at 1.54 million barrel per day in the first quarter.
However, unlike in the past, OPEC+ affirmed full compliance from Nigeria while the group recently pushed for full compliance among other countries.
National Bureau of Statistics said in a gross domestic product (GDP) report for the first quarter of 2021 that Nigeria’s average output for the period was 1.72 million barrels per day.
In the last six years, Naira has been eroded from N197 for official transaction to N410. In the just concluded week, the local currency weakened against the United States dollar at the Investors and Exporters and Bureau De Change window.
Market data shows that exchange rate plunged 0.01% and 0.40% at IEW, BDC respectively to close at N410.80 and N499 respectively. However, Naira closed flat at the black market at N502.00.
Increased spreads between official quote and black market rates created opportunity for arbitrage after the CBN unified its official exchange rate.
MarketForces Africa gathered that currencies traders in the parallel market space are hoarding dollar ro creating artificial scarcity. But the CBN recently told Nigerian banks it readiness to improve supply for eligible transactions.
At the weekend, FX exchange rate closed flat at N380.69 to a dollar at the Interbank Foreign Exchange market amid weekly injections of $210 million by CBN.
The amount was split into $100 million for Wholesale Secondary Market Intervention Sales (SMIS), $55 million was allocated to Small and Medium Scale Enterprises and $55 million was sold for invisibles.
At investors’ window, total turnover decreased by 29.7% week to date to $538.63 million, with trades consummated within the N400.00 – 420.77/$ band.
Elsewhere, the Naira for dollar exchange rate depreciated for all of the foreign exchange forward contracts: 1 month, 2 months, 3 months, 6 months and 12 months exchange rates fell by 0.05%, 0.19%, 0.19%, 0.23 and 0.33% to close at N413.33, N416.54, N419.51, N428.36 and N446.56 respectively.
However, the spot rate remained flat at N379.00.
“In the new week, we expect Naira/$ to stabilize at most FX Windows as crude oil prices at the international market remains relatively high”, Cowry Asset said.
In the Forwards market, the rate appreciated across the 1-month (+0.1% to N413.33/$), 3-month (+0.2% to N419.51/$), 6-month (+0.2% to N428.36/$) and 1-year (+0.3% to N446.56/$) contract.
“We expect improved liquidity in the IEW over the medium term, given the higher oil prices and an expected increase in crude oil production volume. Accordingly, we expect the naira to remain relatively range-bound (N410.00/$ – N415.00/$) at the IEW”, Cordros Capital said.
Bleak Future for Naira as Foreign Reserves Tumble
