Naira Crosswinds: Exports, Foreign Loans Positive for FX Market– Analysts
12 months after the Nigerian local currency, the naira, was devalued and subsequent repricing on FMDQ platform to align with the country’s overall ambition, nothing has been achieved, and everything has been lost.
The previous administration had maintained no devaluation stance for 8 years amidst claims that ex-Central Bank of Nigeria (CBN) governor, Godwin Emefiele spent $1.5 billion each month to defend the local currency from free falling.
Based on his political stance, supposed pro-people mandate, former President, Muhammadu Buhari would not approve the devaluation of the naira for any reason.
Lowering value of the Africa’s largest economy by size of its gross domestic product is in contrast to ex-president Buhari’s school of economic thought.
In a twist, Yemi Cardoso emergence as governor of the apex bank inundated Nigerians, the market with devaluation as his first strategic decision to keep the nation running.
One year after, it has become difficult to anticipate exchange rate direction. Technically, nothing has changed except for another round of promise that things will get better – soon. For some analysts, soon is indefinite, it could also mean forever.
The latest trade data presents a positive outlook for the Nigerian economy, bolstering confidence in its prospects and potentially strengthening of the naira, the local currency.
According to the recently released trade report by the National Bureau of Statistics (NBS), Nigeria’s trade balance increased to N6.52 trillion in Q1-2024.
This translates to 78.5% increase in three months from N3.64 trillion reported in the fourth quarter of 2023. However, 12 months before, Nigeria achieved N20.94 billion as trade surplus.
According to Cowry Asset Management Limited, this improvement in the trade balance is primarily attributed to increased trade activities during the period, with crude oil exports playing a dominant role, accounting for over 80% of the total amount.
“Our expectations for the fiscal year 2024 are based on the assumption that the pivotal role of crude oil production and export, coupled with a decrease in fuel imports, will continue to enhance the trade surplus, subsequently leading to a higher current account balance”.
In true sense of it, Nigerians are already scaling back on imports as reflected in US dollar value of imports in the first three months in 2024.
Though, on the export side, crude oil remain top on the list of foreign receipts. Unfortunately, large chunk of future crude oil export receipt has been used to close an oil-backed loans.
This has kept net external reserves tight amidst expectation that the apex bank will support the naira from falling further. The naira had briefly crossed the N1,500 per US dollar line before previous intervention.
The down side to the local currency recovery is the monetary policy authority’s stance about FX intervention. The CBN pledged not to distort demand and supply allocation of the nation’s tight FX liquidity.
This hasn’t bode well for exchange rate – which has continued to have negative effects on corporate performance, turning balance sheets upside down.
Analysts at Cordros Capital Limited said in a note that the latest trade surplus in Q1-2024 was largely influenced by the lingering impact of naira depreciation.
Nigeria achieved 1.57 million barrels per day oil production in the first three months in 2024 versus 1.51mb/d in the first quarter of 2023. Nigeria’s export in Q4-2023 was valued at N12.69 trillion
Cordros Capital Limited said total exports increased marginally by 1.9% in US dollar terms, settling at USD14.32 billion in Q1-2024 from USD14.06 billion in Q3-2023.
Analysts said whilst total imports surged by 95.5% to NGN12.64 trillion from N6.47 trillion in Q1-2023, in naira terms, imports were relatively lower in US dollar terms reflecting weak domestic consumption, FX liquidity constraints and higher import duty costs.
“We anticipate that increased crude oil production and higher oil prices will continue to support Nigeria’s oil earnings and enhance overall exports in the short term.
Analysts said they also expect the gains from total exports to surpass the rise in total imports in the short term due to favourable terms of trade, potentially leading to a surplus in the balance of trade.
Cowry Asset Management Limited said trade balance is primarily attributed to increased trade activities during the period, with crude oil exports playing a dominant role, accounting for over 80% of the total amount.
Nigeria’s $2.25 billion loans from World Bank, and expectation that oil production will boost FX receipts amidst declining imports is expected to be positive for the naira.
“The only downside to this expectation is what the Cardoso led CBN team thinks about forex market intervention… We’ve gotten to a ride or die point where policy would be promulgated for the benefit of the people with corporate interest in mind”, LSintelligence Associate Research lead told MarketForces Africa in a chat.
“Look at Japan, the country is supporting Yen with huge FX to keep the currency alive against US dollar dominance…Willing buyer, willing seller FX model will damage the naira. It is not the best for a nation that has nothing to export other than oil”, UBA Trades at 34% to 52-Week High
