Nigeria's Foreign Reserves Fall Ahead of Eurobond Payment

Nigeria’s Foreign Reserves Fall Ahead of Eurobond Payment

Sustained intervention in the foreign exchange markets in the immediate past and rising import payments have hit Nigeria’s foreign reserves hard and fast than one would expect for an oil-producing nation. 

Ahead of the Eurobond repayment schedule for July 2023, the nation’s foreign reserves recorded a further decline, last week, trending below $35 billion, data from the Central Bank of Nigeria (CBN) show.

Since the eurobond was raised in March 2022, Nigeria’s debt office reversed a plan to borrow from the international capital market to fund the budget deficit. The decision to back off came following the global increase in interest rates as central banks hike rates to fight off inflation pressures.

US Federal Reserves, and European Central Bank among others have remained tight-fisted on key policy rates, making the costs of borrowing in the eurobond market an expensive one compared to local borrowing. Despite monetary policy tightening that saw a 700 basis points increase in the interest rate benchmark in Nigeria to 18.5%, Federal Government has been accessing borrowing at a lower rate in the bond market, a development that analysts call financial repression.

Next month, Nigeria’s senior unsecured $500 million was issued at a coupon rate of 6.375% to support government finance and will be due for repayment in the international debt capital market. Analysts don’t expect the repayment to trigger immediate issues, though the repayment value has surged after a decision to float the naira.

Last week, gross external reserves dropped by $194 million as Africa’s largest economy by size of gross domestic product’s gross external reserves registered a daily increase of 170,000 barrels of crude oil per day in May, according to a report by the Organisation of Petroleum Exporting Countries.

Until last week, the CBN subjected the nation’s FX reserves to pressures from its various market intervention and forex sales as the monetary authority pseudo-managed the oversize, overpriced local currency

In the foreign exchange market, the naira depreciated significantly to N663.04 versus the United States (US) dollar at the I&E window (IEW), reflecting the impact of the FX market liberalisation. Cordros Capital Limited said in a note to investors that total turnover as of 13 June 2023 declined by 34.2% to USD 378.85 million, with trades consummated within the N460.00 – N791.00 per US dollar band.

In the forwards market, the naira depreciated by 31.2% to N698.21 for one-month contracts, and 3-month contracts reported a 31.9% decline in value to N743.69 per dollar. Also, the 6-month forward contract crashed by 30.9% to N769.91, and 1-year forward contract depreciated by 29.0% to N790.62.

Projecting into the week, analysts Cordros Capital said they expect the re-introduction of the “willing buyer, willing seller” model at the IEW to influence the exchange rate direction.

“… while the CBN’s abolishment of its multiple FX windows is positive in boosting foreign investors’ confidence, we think they will adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boosting FX supply to support the market in the near term”, Cordros Capital stated. #Nigeria’s Foreign Reserves Fall Ahead of Eurobond Payment

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