Increased foreign exchange interventions drain external reserves – Analysts

Analysts WSTC Securities Limited   has connected the reduction in gross external reserves amount  to increase intervention by the Central Bank of Nigeria  in the investors and exporters (I&E) window.

The nation’s gross external reserves has reduced to about $36.3 billion in early March as against more than $45 billion in the second half of 2019.

In a recent report, analysts at the firm held that the apex bank intervention in the I&E increased significantly in February.

The external reserves recorded a net outflow of $1.7 billion in February 2020, representing a 4% decline to N36.26 billion.

At this level, analysts said the external reserves are currently close to the CBN’s resistance level of $35 billion.

Pundits have predicted that the CBN would deploy policy tools to upturn persistent reduction in the external reserves, a resultant effect of low dollar inflows into the economy.

External reserve dropped from its peak point in the second half of 2019 to $36.5 billion in February.

This trend has caused anxiety in the FX market as some currency traders think devaluation may be on the way.

However, the CBN  has also said that the local currency would not be devalued.

In a meeting, analysts at Coronation Merchant Bank also supported the CBN, said Naira would not be devalued in 2020.

To manage the external exposure, the CBN announced decision to expand the tenors of the OTC-settled FX futures to a maximum 5-year tenor.

The tenor of OTC-settled FX futures was 1 year initially.

“The rationale for this move is deemed to attract foreign portfolio inflows, in a bid to shore up external reserves and maintain stability in the foreign exchange market”, analysts at WSTC Securities remarked.

Analysts said by extending the future contracts tenors, it could induce portfolio investors who had hitherto worried about the long-term currency risk of the economy to invest in Nigerian assets.

Overall, the exchange rate depreciated slightly by 0.35% in the Investors and Exporters (I&E) window to N365.25/$1 from N364.17/$1 as of the start of February.

Market intervention of the CBN in the I & E window increased considerably during the period.

“We believe that the significant rise in the interventions of the CBN in the I&E window resulted in the decline in the external reserves”, WSTC remarked.

Inflows from foreign investors -both Portfolio and Direct Investments- declined to $1.18 billion in February 2020 from $2.09 billion in January 2020.

On the other hand, inflows from the CBN rose to $2.09 billion in February 2020 from $386.20 million in January 2020.

Increased foreign exchange interventions drain external reserves – Analysts