Naira in mixed performance as forex reserves decline by $198m

The naira recorded a modest appreciation at the official window but was flat at the parallel market as Nigeria’s foreign exchange (forex) reserves dropped by $197.84 million to $35.01 billion at the weekend.

The naira appreciated by 0.3 per cent to N395.00 per dollar at the official Investors and Exporters (I & E) window, but remained unchanged at N475 per dollar at the parallel market.

A report by Cordros Securities at the weekend showed that naira also recorded mixed performance in the forwards market. While the naira weakened by 0.1 per cent to N398.01 per dollar for the one-month contract, it appreciated in all other tenors. The three-month contract appreciated by 0.5 per cent to N404.54 per dollar. The six-month contract rose by 0.7 per cent to N414.90 per dollar while naira appreciated by 1.0 per cent to N435.32 per dollar for the one-year contract.

Analysts attributed the continuing decline in forex reserves to outflows for the Central Bank of Nigeria (CBN)’s interventions across the various forex windows, which continued to outstrip dollar inflows.

Senior Research Analyst, FXTM, Lukman Otunuga, said fall in forex inflows could limit the potential recovery of naira.

“Going forward, we expect CBN’s forex management strategies to continue supporting the naira at its current level at the official and I&E windows. However, we believe the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity (RPPP) of N433.64 per dollar and our REER fair value estimate of N453.67 per dollar at the current level of intervention in the forex market,” Cordros Securities stated.

Most analysts expected further market-driven devaluation of naira, although the apex bank could stifle that if crude oil price stabilises and forex reserves accretion improves.

The World Bank indicated that Nigeria needs to reflect a more market-driven value for naira in order to access further loan from the bank.

According to analysts, one of the critical reforms demanded by the World Bank to approve Nigeria’s request for $1.50 billion budget-support loan is for the country to allow for a more unified and flexible exchange rate regime which has an economic impact of improving the attractiveness of naira assets to foreign investors.

“We, however, think the Federal Government is unlikely to surrender its managed float regime and will continue to embark on its demand management strategy while waiting on oil prices to stabilise around $55/bbl, based on our estimates. Consequently, we believe the Federal Government will opt for raising funds via the Eurobond market in 2021, given the likely rejection of the loan application,” Cordros Securities stated.

Nigeria’s trade position worsened for the fourth consecutive quarter as the merchandise trade deficit widened from N1.80 trillion in second quarter 2020 to N2.39 trillion in third quarter 2020. The reading marked the largest quarterly deficit since at least 2008, as exports plummeted while imports beat their pre-pandemic levels.

Exports declined significantly by 43.4 per cent due to the compliance with the OPEC+ oil production agreement and lower oil prices. However, imports increased by 38.0 per cent due to the demand for food items, chemical products, and machinery as they jointly contributed 70.0 per cent to the total imports during the period.

“We expect the continued compliance with oil production cuts and still depressed oil prices to keep weighing on crude oil exports, 81.0 per cent of exports. Conversely, the improvement in domestic activities is expected to keep imports on the rise, resulting in the trade balance remaining in deficit in fourth quarter 2020,” Cordros Securities stated.