Despite Oil Shock, Organic Portion of External Reserve Rises
The organic portion of the external reserves rise to $16.3 billion in the second quarter of 2020, representing a 3.9% increase from the first quarter.
According to analysts, the rise occurred despite decline in global prices of oil in the period.
Nigeria’s external reserve has been hovering below $36 billion in the third quarter of 2020 as global economic lockdown eased.
In the foreign exchange market, the naira to dollar currency pair closed the week largely flat at N379.00, N380.69, and N385.83 at the official, SMIS, and I&E windows, respectively.
Meanwhile, average daily turnover at the Investors and Exporters window (IEW) expanded by 8.5% wow to US$100.67 million.
Chapel Hill Denham said in a note that this was largely supported by the apex bank’s sustained FX intervention across its various windows.
Elsewhere, pressures continued in the parallel market as the local currency weakened further by N1 or 0.22% to 462.00.
Chapel Hill Denham said the latest investment position data from the Central Bank of Nigeria (CBN) puts foreign portfolio investors (FPI) holdings of local currency equities, bonds and CBN OMO bills at US$2.8 billion, US$1.3 billion and US$11.2 billion respectively in June 2020.
“Majority of these funds are trapped and unable to exit due to lack of FX liquidity in the I&E Window, further emphasising the needs for greater FX flexibility by the CBN”, Chapel Hill Denham said.
The nation’s external reserves stood at US$35.7 billion, but Chapel Hill Denham said it estimates the organic portion at US$16.3 billion.
The firm arrived at the figure after deducting FPI holdings of OMO bills (US$11.2 billion) and CBN’s SWAP position (US$8.2 billion) in June 2020.
However, analysts said despite the oil shock in Q2-2020, the organic reserves grew by 3.9% quarter on quarter from US$16.1 billion in March 2020.
The growth was attributed to inflows from multilateral disbursements by the valued at US$3.4 billion by IMF and US$288.5 million from .African Development Bank.
In what ended up being an historic week for Nigeria’s bond market, analysts said yields collapsed in a dramatic fashion to the lowest level since data became available in 2007.
Notably, the benchmark bond yield curve compressed by an average of 108bps week on week to 4.82%.
Also the generic 10-year and 20-year yields fell by 178bps and 200bps week on week to record lows of 5.28% and 6.62% respectively.
Chapel Hill Denham noted that short term rates were not excluded from the rally, as interbank funding rates were stuck at low single digits due to robust financial system liquidity, partly attributable to OMO maturities (N370bn) on Thursday.
“The main catalyst for the rally was the publication of the October 2020 bond offer circular by the Debt Management Office, which revealed that FGN bond supply will be much lower than previous months”, analysts said.
Notably, the DMO plans to supply only N30 billion, split between the 15Y MAR 2035 reopening (N15bn) and 25Y JUL 2045 reopening (N15bn).
Also, the Nigerian Treasury Bills primary auction on Wednesday closed bullish as demand was strong against relatively thin supply (bid-cover ratio of 4.9x).
The DMO sold N124.88bn and stop rates cleared lower by an average of 46bps to 1.33%: 91-day at 1.00% (-8bps), 182-day at 1.00% (-49bps) and 364-day at 2.00% (-80bps).
The record low yields in the fixed income market came despite elevated inflationary pressures, as the September headline inflation rate printed higher by 49bps to a 31-month high of 13.71% year on year.
The inflation print was a positive surprise to our initial forecast of 14.00%, but understandingly so, as the hike in electricity tariff at the start of the month was reversed by the regulator following a negotiation with the labour unions.
As a result, analysts said the primary driver of inflation in the month remained food prices (+66bps to 16.66%), while the core basket surprised positively (+6bps to 10.58%).
“We expect the market to continue to trade upbeat in the near term, due to thin supply of government securities against elevated demand as a result of high liquidity”, Chapel Hill Denham said.
“By our estimate, the DMO has already issued 93% of its planned domestic issuance.
“We estimate outstanding domestic issuance for 2020 at N331bn, relative to C.N3.3tn OMO maturities, N473bn NTB maturities and three outstanding FAAC disbursements.
“Against this backdrop, we believe odds favour further yield compression, at least until supply increases in January 2021”, Chapel Hill Denham noted.
This week, analysts said they expect funding pressures to remain benign, supported by bond coupon payments estimated at N32.67bn today, OMO maturities estimated at N285bn on Thursday and FAAC allocation for October (aboutN320bn).
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Despite Oil Shock, Organic Portion of External Reserve Rises
