External reserves projected to hit $30 billion in Q1

By January 31, 2017 Investment News

Nigeria’s external reserves which fell to a low of $23.9 billion on October 19, 2016, has been projected to increase to $30 billion in March this year, by analysts in the financial services sector.

Nigeria’s foreign reserves stood at $28.9 billion as at Tuesday, January 24, 2017, driven by surging oil prices and relative stability in the Niger Delta.

The nation’s reserves recorded the highest level in the last three years on May 2, 2013, rising to $48.9 billion when the price of crude oil was $103.03 per barrel.

Godwin Emefiele, governor of the Central Bank of Nigeria (CBN) had said rising oil prices have seen foreign exchange reserve inflows through the CBN rise by well over 82 percent, helping push the external reserves to a current high of $28.9 billion.

Analysts observe that the consistent rise external reserves will help boost investor confidence and the chances of Nigeria’s success in the planned US$1 billion Eurobond issue in March.

While acknowledging the positive increase in foreign reserves, analysts are concerned that there is a huge backlog of foreign exchange demand yet to be cleared.

Razia Khan, managing director, Chief Economist, Africa Global Research, Standard Chartered Bank, said there has been a surprisingly rapid acceleration in foreign exchange reserves in Nigeria in recent weeks.

“It is not yet clear what is driving it. CBN cash flow data appears to suggest large non-oil related inflows in December. With improved oil output and prices (output looks more hopeful following the success of recent government negotiations with the Niger Delta, while oil prices are benefiting from the recent OPEC agreement), there is no reason why FX reserves should not get to USD 30 billion”, Khan said in an emailed response to BusinessDay.

She added that with successful Eurobond issuance, for which there remains substantial investor appetite, Nigeria’s foreign exchange reserves may get another substantial boost.

“But bear in mind that there is also a considerable backlog of yet-to-be-settled dollar demand. This issue remains unresolved”, she said.

Also in an emailed response to BusinessDay, Taiwo Oyedele, PwC head of tax and regulatory services, West Africa Tax Leader, said high foreign exchange reserves give a positive signal about the financial strength of the economy and should help improve investor confidence.

Oyedele however, strongly believes that the real benefit will only be realised if it is complimented by other factors such as sound exchange rate management, better investment climate, ease of doing business, security of lives and property and overall economic well-being.

Charlie Robertson, global chief economist and head of macro strategy at Renaissance Capital, said in an emailed response, that it may make the CBN more comfortable about allowing greater exchange rate flexibility

“There has been a positive accretion in foreign reserve, at the same time we are not paying our bills. In terms of forward provision, at the last count, we have about $4 billion of unsettled forward contracts. If we are to settle that immediately, that will take about $4 billion from the external reserve and its back to less than $28 billion, without including the new demand for dollars this month, quarter and the rest of the year”, Ike Chioke, managing director, Afrinvest (West Africa) Limited, said.

“The challenge is that we have not got to the ideal situation where there is enough confidence built into the country. Our governance framework, our policies and the economic turnaround plan, that investors find the opportunity to come into the country”, he added.

Reacting to the development, Robert Omotunde, head, investment research, Afrinvest, noted that Nigeria’s foreign reserve is mainly driven by proceeds from crude oil, and as such, the possibility of a significant increase in the reserves would be hinged on production volumes and the price of crude oil.

“For the production volume, we have seen some slowdown in disruptions in the Niger Delta region where a lot of militancy activities have been going on in the past, whilst we are very optimistic about the price, given the OPEC deal on a cut in production level from which Nigeria is being excluded.

“Given that there is an improvement in these two factors, we see a significant increase in the nation’s foreign reserves. This was largely attributed to a reduction in militancy activities in the Niger Delta, as well as the OPEC deal in December. As such, the possibility of Nigeria hitting US$30.0bn by March cannot be ruled out.

“For the economy, it simply means the CBN can continue to defend the naira in the interim, however, this will not be sustainable in the medium to long term”, Omotunde said in an emailed response to BusinessDay.

Crude oil prices have stayed above $50 per barrel (pb) throughout 2017 and closed the period at $55.4pb on January 16th. Current prices are 86.5 percent higher than a year ago of $29.7pb. Crude oil accounts for more than 90 percent of Nigeria’s foreign exchange earnings.

Source: BusinessDay