Nigeria’s Current Account Deficits Print at 4% of GDP
Godwin Emefiele, CBN Governor

Nigeria’s Current Account Deficit Prints at 4% of GDP

Nigeria’s current account deficit widened in the fiscal year 2020 to 4% of the nation’s gross domestic product (GDP) from 3.6% in the comparable year in 2019 as exports earnings tumble. In 2020, after falling by about 2% year on year, Nigeria remained the largest economy in Africa with $443 billion GDP size, followed by Egypt which recently outpaced South Africa as the second largest economy, recording $362 billion GDP.

The recently published balance of payment data for the fourth quarter of 2020 actually current account deficit moderated when compare with the comparable period in 2019.

In a macroeconomic note, Chapel Hill Denham predicted that the oil market rebound will halve the deficit position to 2% in 2021.

Detail of the CBN report indicated that the current account deficit narrowed on a year-on-year basis by 21% due to a relatively higher base.

Nigeria’s Current Account Deficits Print at 4% of GDP
Godwin Emefiele, CBN Governor

But, when the fourth quarter is compared with third quarter position, it expanded on this quarterly basis by 45% to US$5.3 billion or 4.5% of GDP, up from US$3.6 billion or 3.5% of GDP in Q3-2020.

“This reflects wider goods, services and income deficits, while current transfers improved”, Chapel Hill Denham explained.

For 2020, the current account deficit widened to 4% of GDP from 3.6% of GDP in 2019, mainly due to a 45% collapse in exports, which led the trading account to swing from a surplus of 0.6% of GDP in 2019 to a record deficit of 3.8% of GDP in 2020.

“The report confirmed our view that the adjustment process in the balance of payment is incomplete, and further FX devaluations would be required to achieve this”, Chapel Hill Denham said.

Nigeria’s Current Account Deficit Prints at 4% of GDP

Meanwhile, analysts said they expect the current account deficit to halve to 2% of GDP in 2021, due to recovery in oil prices and capital control policies put in place by the CBN. Last week, the Naira exchange rate continued to trade within a tight band at all segments of the FX market.

The I&E window rate depreciated by a marginal 0.32% or N1.33 week on week to N411.67, while the Parallel market rate weakened by 0.2% or N1.0 week on week to N484.00.

Activity levels weakened at the Investors and Exporters window to a daily average of US$111.4 million, down 5% from US$116.9 million in the prior week.

“CBN stopped daily publication of the official rate on its website. While this could imply the unification of the Investors and Exporters Window and the official rates, more clarifications will be needed, given that the official rate is still published by the FMDQ”, Chapel Hill Denham said.

However, analysts at the firm said they look forward to the May Monetary Policy Committee Meeting holding next week for concrete affirmations about this development.

At the debt market, in a relatively short trading week, due to the mid-week Eid al-Fitr holidays, the Nigerian fixed income traded mixed. The bond market traded mildly bullish, due to renewed interest in long-duration bonds, while the short end of the curve was under pressure.

Overall, the benchmark bond yield curve compressed by an average of 6 basis points last week to 13.17%.

Meanwhile, Front end rates were mixed, as the Nigerian Treasury Bill benchmark curve was flat at 4.35%, while the open market operations (OMO) curve expanded by 11bps in the week to 8.10%.

Analysts said interbank funding pressures remained elevated throughout the week. As a result, funding rates remained in double-digit and peaked on Friday due to provisioning by Banks for the fortnightly retail FX auction.

At the Treasury bill auction which was held last week, the CBN offered N117.6 billion worth of bills, split across three maturities: 91-day (N24.7 billion), 182-day (N10.0 billion), and 364-day (N82.8 billion).

Chapel Hill Denham remarked that the subscription level was decent at 2.0x, up from 1.7x previously as the CBN allotted N139 billion.

Thus, the auction stop rate increased by 50 basis points on the 91-day to 2.50%, while the 182-day and 364-day were unchanged at 3.50% and 9.75% respectively. According to its calendar, the Debt Management Office (DMO) will be auctioning N150 billion worth of bonds on Wednesday, 19th May.

At the auction, Chapel Hill Denham’s analysts said the DMO will be looking to raise N150 billion, split across three tenors: MAR 2027, MAR 2035, and APR 2049.

Recall the April auction cleared at 12.25%, 13.34%, and 13.85% respectively. As with recent trends, analysts said the DMO is expected to try as much as possible not to move the market, by keeping auction yields close to subsisting interest rates in the secondary market.

“As a result, we expect auction yields to clear higher by less than 80bps relative to the last auction”, Chapel Hill Denham said.

The firm also revealed the expectation that the headline inflation rate will maintain an uptrend, to print higher by 50bps to 18.7% in April from 18.17% in March. “Given widening external imbalances and elevated inflationary pressures, we expect a hawkish bias at the upcoming MPC meeting next week.

“With the outlook for yields biased to the upside, we expect duration apathy to persist in the near to medium term”, Chapel Hill Denham stated.

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Nigeria’s Current Account Deficit Prints at 4% of GDP

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