Equity research analysts at the Assets and Resources Management (ARM) Securities Limited has estimated a $7.8 billion drop in the nation’s external reserve, as the firm anticipates lower accretion from foreign investments in 2020.
Jumoke Ogundare - Chief Executive at Assets & Resources Management Ltd

FPI Scarcity: Analysts Estimate $7.8bn drops in External Reserves

  • FX Rates: ARM Securities sees limited downside risk in 2020
  • Analysts Anticipate Pressure on Nigeria’s FX Position
  • Foreign Investors Repatriation Risk to Impacts Inflow
  • Limited Sales at IEW forcing foreign investors to roll over despite lower rates.

Equity research analysts at the Assets and Resources Management (ARM) Securities Limited has estimated a $7.8 billion drop in the nation’s external reserve, as the firm anticipates lower accretion from foreign investments in 2020.

In its second half of 2020 report, ARM Securities Limited estimate said foreign portfolio investment (FPI) inflows and oil receipts jointly accounting for about 50% of CBN’s FX inflows.

This development is occurring at the same time when foreign investors are unable to move dollar due FX scarcity.

Foreign reserves will close the year at $28.8 billion, falling below the Central Bank of Nigeria’s $30 billion comfort level, ARM Securities projected.

In coming to term with the estimates, analysts explained that the events over the first half of 2020 revealed the apex bank’s vulnerability to external shocks.

FPI Scarcity: Analysts Estimate $7.8bn drops in External Reserves
Jumoke Ogundare – Chief Executive at Assets & Resources Management Ltd

The CBN’s multi-tiered managed foreign exchange rate regime has faced significant pressures, following constant drop in the nation’s external reserves.

Meanwhile, analysts said foreign portfolio investment (FPI) inflows and oil receipts jointly accounting for about 50% of CBN’s FX inflows.

“While we expected the CBN to give in to mounting pressures on the reserve, we didn’t envisage that happening this year”, ARM said.

The firm explained that with limited string to its bow, the CBN was forced to adjust the tightly held official rate from ₦306/$1 to ₦360/$1.

In addition this, rates at the Investors and Exporters window (IEW) were revised higher to a maximum of ₦380/$1 from an average of ₦360/$1.

Thus, average rate at the parallel market depreciated by 19.8% year to date to ₦455/$1.

However, the reserves only depleted by $2.4 billion over first half of 2020, thus reflected $3.4 billion and $278 million inflows from IMF and AfDB respectively.

Though, average import cover expanded to 9.2 times compare to 7.9 times in the second half of 2019 which largely reflects the faster decline in imports.

ARM Securities said going into the rest of the year, despite CBN’s administrative controls, it expects further depletion in the FX reserves on the back of lower inflows.

While the $3.4 billion IMF loan facility will provide a temporary relief, the CBN would be counting on disbursement of facilities from AfDB and World Bank, analysts explained.

Overall, the investment firm forecast a depletion of $7.8 billion over the second half of 2020 with the FX reserve closing the year at $28.8 billion.

That said, ARM said the estimates excludes $1.5 billion expected inflow from World Bank and $222 million from AfDB.

“Including these inflows to our model will take the reserves to circa $32 billion by year end”, analysts explained.

Given our expected level of reserve relative to CBN’s proclaimed comfort level of $30 billion, we see limited downside in FX rates over the rest of the year.

ARM Securities explained that after six consecutive months of outflow, balance of flows printed at a net inflow of $561 million in January 2020.

This was driven by increased foreign portfolio investment inflows as well as a moderation in outflows, analysts noted.

“In fact, the CBN for the first time in seven months became a net buyer at the window.

“However, the subsequent month challenged CBN’s stance against an imminent naira doom”, ARM Securities explained.

Meanwhile, the firm noted that the death toll from the covid-19 pandemic rose rapidly resulting into lockdowns and reduced economic activities across the World.

Consequently, the CBN took to administrative control in order to limit the pressure on its reserve.

Research analysts said that this helped reduce total outflows by 31.9% over the first half of 2020 to $10.2 billion.

Specifically, FX sales to BDCs was suspended, due to the border closure and travel restrictions across the world which was expected to reduce FX demand.

Since April, the apex bank halted sales at the IEW, forcing most foreign investors to roll over investments despite lower rates.

ARM Securities stated that despite foreign investment maturity of $6.5 billion with estimated FPI holdings of $3.2 billion between April and June, the IEW only recorded total outflows of $987 million during same period with CBN recording no sale at the window.

Prior to this, analysts said the CBN net sold $4.6 billion at the IEW in Q1 20, which reflected lower inflows of $5.5 billion compared to outflows of $9.2 billion over same period.

In addition, rates for different users at the IEW were adjusted upwards from prevailing rates of ₦360/$1 – ₦365/$1.

Consequently, analysts explained that applicable FX rates from International Money Transfer Operators (IMTOs) to Banks was adjusted to ₦376/$1.

Then, Banks to CBN (₦377/$1), CBN to BDCs (₦378/$1) and maximum of ₦380/$1 from BDCs to end-users.

It recalled that in the heat of the moment, the FG got approval of a $3.4 billion loan facility which was eventually disbursed in April.

This has helped prop up the reserve to $36.3 billion from a 30-month low of $33.7 billion in March.

Net FX Position, Hedge Contracts to Help Banks Survive Pressure

Meanwhile, sales to the BDC segment remained on hold pending resumption of international flights.

Aside the IMF facility, the FG awaits approval of a $1.5 billion and $212 million from World Bank and AfDB respectively.

Beyond 2020, analysts stated that they envisage more pressure on Nigeria’s FX position and the CBN’s fate is likely to continue relying on external financing in the form of multilateral loans.

Analysts stated that the earliest possible time for the availability of the highly anticipated vaccine globally, according to consensus expectations is Q1 2021.

Thus, the firm anticipates a slow pick up of global economic activities which also translates to a slower recovery in global oil prices to the peaks of $60 – $70/bbl levels observed in January.

Furthermore, with CBN’s recent posture of winding down OMO obligations, cutting the OMO rates together with foreign investors’ increased repatriations risk perception.

“We see limited inflows even till first half of 2021”, analysts said.

It is worth stating that, in addition to the lower flows, we could see further squeeze on the reserves stemming from recovery in visible and invisible imports, maturity of investments which were earlier rolled over in the first half of 2020.

In the first week of July, analysts recalled that the CBN further increased the Retail Secondary Market Invention auction (SMIS) rate to ₦380.5/$1 from ₦360/$1.

It’s worthy to note that over 70% of transactions at the auctions were occurring at over ₦380/$1 prior to the adjustment.

Hence, we believe the adjustment reflected CBN’s need to unify its various exchange rates.

To buttress, the World Bank has been hampering on the need to unify the various exchange rates and adopt a more flexible exchange rate regime; which is one of the conditions for disbursement of a $1.5 billion loan facility.

In our view, we see the possibility of an upward adjustment to the CBN official rate in line with the World Bank’s condition of unifying rates. However, in the longer term, with the managed float still in place, we believe the exchange rate disparity will persist.

“In framing our outlook for the rest of the year, we focus on key drivers of flows into CBN coffers”, ARM Securities said.

Despite CBN’s administrative controls, analysts said they expect further depletion in the FX reserves on the back of lower inflows.

While the $3.4 billion IMF loan facility will provide a temporary relief, the CBN would be counting on disbursement of facilities from AfDB and World Bank.

On inflows, analysts anticipate lower oil inflows and non-inflows over the rest of the year.

For oil inflows, analysts said they expect a pickup in oil demand and oil price but foresee a scope for lower oil production as Nigeria increases compliance to the OPEC+ production cut.

Thus, analysts estimate oil production to average 1.7 million barrels per day (mbpd) over second half of 2020 compared to 1.98 mbpd in the first half.

“Overlaying this with our oil price estimate, we project a 33% decline in oil inflow to $4.0 billion”, ARM Securities stated.

However, for non-oil inflow, analysts said they think FPI flows will remain depressed over the rest of the year.

ARM Securities said it expects foreign investors to favor less risky markets on the back of concerns of a second wave of the covid-19 pandemic and its impact on economies.

Furthermore, analysts think CBN’s present rationing of dollar casts a doubt on emergence of new flows.

“We expect the foregoing to translate into lower FX purchases by the CBN with total non-oil inflow estimated at $12.8 billion in first half of 2020 from $15.8 billion in the second half of 2019.

“On outflows, while we expect a gradual pick up in the economy over second half 2020 and by extension visible and invisible imports, we think constraints placed on repatriation of FPI flows will curtail total outflows from the FX reserves”, ARM Securities stated.

Elsewhere, analysts said they also foresee a reduction in the frequency or amount of BDC sales in the coming months as a means to curb outflows from the FX reserved.

“Thus, we project a 10.3% decline in outflows over the second half of 2020”, ARM Securities explained.

FPI Scarcity: Analysts Estimate $7.8bn drops in External Reserves

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