Declining External Reserves Threaten CBN’s FX Market Intervention| The declining in the amount credited to the nation’s external reserves threatens the apex bank ability to supporting the local currency in the foreign exchange market, analysts have stated.
Naira has been largely stable since 2017 when Central Bank of Nigeria www.cbng.gov.ng introduced its multi-tiered foreign exchange management, but analysts are seeing negative signal as earnings from foreign trades lower.
Stability enjoyed by the Nigeria’s local currency in the foreign exchange market is more likely to be threatened as external reserves buffer available to support it continues to reduce.
The review of the figures shows that the nation’s gross external reserves inched down by about 14% from $45.1 billion peak level in 2019 to $39.6 billion on Sunday.
Though critics say the CBN’s multi-tiered foreign exchange is unconventional, but naira has enjoyed stability since the introduction of managed FX strategy.
Some experts also laud the development of multi-tiered FX market, say it locked door against currency arbitrage.
Samir Gadio, Head Africa Strategy at Standard Chartered stated in an email that Investors and Exporters FX window has become the most liquid FX market since its introduction in 2017.
According to Gadio, there is probably limited room for arbitrage at this point because foreign investors transact in the I&E window and cannot source FX via other windows at discounted rates when they exit the Nigerian market.
“Further gradual FX convergence will likely materialises over time…But a multiple exchange rate is likely to persist in the foreseeable future”, Gadio said in an email.
He added that as long as FX supply remains adequate in various windows, it is unlikely that a significant shift in local demand to the I&E could take place.
Analysts told MarketForces that declining external reserves could unleash pressure on the apex bank’s ability to support the local currency as fiscal year 2019 winding down on weak indices.
“With the current macroeconomic condition and lower accretion from foreign receipts, there is a bleak future for the local currency”, analysts said at MarketForces forum at the weekend.
Analysts revealed that lower revenues generation, scarce foreign portfolio investment support and wobbling global prices of oil that have resulted to declining balance in external reserves.
Afrinvest, a leading investment banking firm, in a review noted that the external reserves sustained its downtrend, depreciated to $39.617 billion.
The nation’s external reserve had hit $45 billion in May 16th 2019 as a result of increased foreign receipts from strong global prices of oil and stable oil productions.
Analysts at the firm are of the view that the declining external reserves raise concerns on the Central Bank of Nigeria’s (CBN) ability to maintain exchange rate stability.
It said the outlook for the FX reserves remains dim due to low oil prices and increasing reversal of Foreign Portfolio Investment (FPI) inflows.
The CBN spot rate close the week at ₦306.95/$, appreciating by 5kobo week on week from ₦307.0/$. At the parallel market, the exchange rate traded flat all week to close at ₦360.00/$.
At the Investors’ & Exporters’ (I&E) FX Window, the Nigerian Autonomous Foreign Exchange (NAFEX) rate ended the week at ₦363.14/$ on Friday, depreciating 33kobo week on week from ₦362.81/$.
Activity level in the Investors & Exporters Window advanced 44.4% to $1.2 billion from $879.4 million recorded in the previous week.
There was an increased buying interest at the over-the-counter (OTC) FX futures market, leading to an uptrend in the total value of the contracts by 3.5% to settle at $10.1 billion from $9.7 billion recorded in the previous week.
Afrinvest revealed that the NOV 2020 contract saw the most buying interest as investors took additional position worth $175.3 million, with the total value of the contract increasing to $265.1 million.
Meanwhile, the APRIL 2020 contract enjoyed the least buying interest as investors bought only $1.1 million to put the value of the contract at $746.1 million.
“In the coming week, we expect the CBN to sustain its weekly intervention in the forex market”, Afrinvest predicted.
Research analysts at MarketForces stated in a report that the FX regime in Nigeria is more policy managed than in most emerging markets.
The report observes that the CBN as a result of accretion in the external reserves has ample FX balance to support current USD-NGN level in case of renew pressure.
“Supportive oil prices and benign import demand as economic growth remains subdued should limit risk to exchange rate”, a Lagos-based financial analyst told MarketForces.
MarketForces gathered from experts that there is no reason to suggest that the CBN will depart from its current FX stance. There could be some reallocation of onshore FX demand to the I&E window but the pressure would remain managed.
