Trade Deficit Reflects Depth of Nigeria’s FX Issue –Cardinalstone
Cardinalstone Partner, a leading investment banking firm headquartered in Lagos has said that trade deficits recorded in the second quarter of 2020 underscores depth of Nigeria’s foreign exchange (FX) issues.
Recalled that before the apex bank announced plan to resume its weekly FX sales to Bureau de Change (BDCs), naira had plunged significantly.
However, analysts have expressed concern as to declining foreign investment inflow to support the Central Bank of Nigeria’s FX intervention.
The recent report on capital imported into the country in the second quarter indicates about 79% decline as foreign investors shy away from participating in the economy.
Again, trade balance plunged to historic lows; thus corroborates depth of FX crisis.
In Q2, data from the National Bureau of Statistics revealed that the economy experienced its worst trade deficit (N1.8 trillion) in over a decade in the second quarter.
This is partly underscoring the depth of Nigeria’s recent currency crisis, analysts at Cardinalstone said.
The weakness in the trade balance reflected a 45.6% quarter on quarter drop in exports to N2.2 trillion, which offset a 10.7% quarter on quarter fall in imports.
The investment firm said unsurprisingly, export pressures were indicative of lower per barrel crude oil prices which dropped 34.8% quarter on quarter; or 51.5% year on year and weaker oil production.
The firm said though the goods and services balance has historically contributed positively to the current account (save for 2016 recession), the recent plunge in exports effectively compounded pressures from lower FPIs and remittances in the review quarter.
Cardinalstone said the “new normal” sparked by COVID-19 disruptions could see this pattern subsist for most of 2020.
“This, in our view, could compound Nigeria’s balance of payment difficulties amid lower foreign portfolio investment (FPI) and remittance flows.
Given the external vulnerabilities (mostly occasioned by weaker oil economics), providers of short- and long-term capital were expectedly averse to naira assets in the review quarter.
Notably, Q2 capital importation plunged by 78.6% year on year to $1.3 billion, with hot money at about 56.1% of total inflows, collapsing by 90.6% year on year.
“We expect foreign providers of capital to maintain their risk-off sentiments for the rest of the year given global cautiousness and forecast a 20.0% decline in remittances to $18.8 billion.
“Our view on the latter is premised on rising unemployment numbers in Europe and North America, both of which typically account for 53.0% of total remittances”, Cardinalstone noted.
Elsewhere, the drop in foreign exchange earnings coincided with the cessation of CBN interventions at the investors and Exporters and BDC windows (until recently) and deployment of several dollar demand management measures.
Cardinalstone stated that the ensuing scarcity culminated in a panic-induced parallel market premium (over the I&E rate of N386/$) that widened to as high as N96/$, as unfilled demand in the official windows flowed into the mostly unregulated black market.
The apex bank has, however, recently weighed in via the issuance of circulars aimed at plugging FX leakages from imports and improving export repatriation outcomes.
The apex bank also resumed partial dollar sales at both the I&E and BDC windows, subsequently cascading to NGN appreciation at the parallel market.
FX market reprieve would require more than gradual resumption of sales by CBN
The recent restart of FX sales to BDC operators is in line with the CBN’s earlier guidance to recommence supply upon resumption of international travel.
“We expect this move, if sustained, to ease the speculative pressures at the parallel market”, analysts.
However, Cardinalstone assess that the renewed supply to BDCs may fail to catalyze a reversion to pre-COVID-19 levels nor drive full exchange rate unification across various windows.
“To this point, we first note that CBN’s plan to sell a maximum of $10,000 to BDC operators twice a week, amounts to c.$60 million a week (assuming 3000 BDCs) which pales in comparison to about $225 million per week sold to BDCs before COVID disruptions”, Cardinalstone stated.
Also, analysts said the latent FX demand from FPIs and manufacturers, in addition to new demand from would-be travelers, may continue to exert currency pressure.
Cardinalstone detailed that the CBN may decide to increase its volume of sales to this market as travel activities pick up.
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“But to drive exchange rate unification, higher BDC sales may have to be complemented by an improvement in liquidity at the I&E window.
“Considering CBN’s current FX constraints, with FX reserves at between $16-18 billion, after adjusting for FPIs and swap obligations, we believe that Nigeria is unlikely to achieve full FX rate convergence without another currency repricing”, Cardinalstone stated.
Trade Deficit Reflects Depth of Nigeria’s FX Issue –Cardinalstone
