THE central Bank of Nigeria (CBN) is likely to throw a whopping $53 billion at the foreign exchange market in its expensive policy drive to provide forex liquidity in order to support the Naira and keep the local currency stable.
This amount, when converted to the Naira at the official CBN rate of N310 per dollar, will amount to a whopping N16.43 trillion, almost double the value of Federal Government’s N8.73 trillion budget for this year.
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If this happens, monthly average reserve draw down of $431 million adding up to $5.2 billion over 2019 will exert pressure on the foreign reserve forcing it to close 2019 at $38.5 billion or $41.2 billion if adjusted for the proposed $2.7 billion Eurobond, said the analysts at ARM Research Limited.
In a H2 18 Nigeria Strategy Report, financial analysts at the Lagos-based firm noted that the impact of capital flight and lower portfolio inflows largely due to political uncertainty will give rise to marked drawdown stemmed largely from an enlarged repatriation of maturing fixed income instruments held by offshore investors.
According to them, the sizable repatriation and paucity of flows at the Investors and Exporters Window (IEW), which last year prompted the CBN to step up its intervention over H2 18 across markets compared to H1 18 with overall intervention printing at$26.5 billion will likely continue in 2019.
“With our model suggesting cumulative slower CBN intervention over 2019 to the tune of $53 billion (three per cent lower year-on-year), we estimate average monthly sale of $4.5 billion (as against $4.7 billion in 2018).
“While this suggest a comfortable position for the apex bank and the naira, we believe the distorted interplay of demand and supply at the IEW and the increased demand at same would drive short term volatility in rates and an eventual adjustment to our fundamental driven purchasing power parity (PPP) estimate of between N397.61/$ to N401.50/$ (8-10 per cent down-leg from current NAFEX rate of N362.00/$ at the end of December 2018),” said ARM researchers.
However, research analysts at Coronation Research, a subsidiary of Coronation Asset Management Limited, said that the apex bank would spend average of $500 million per month in its interventions at the foreign exchange (forex) market.
At prevailing official CBN’s exchange rate of N310 to a dollar, the CBN would have spent a minimum of $6 billion by end of December, 2019 which will add up to N1.86 trillion, almost a quarter of the 2019 budget.
According to them, Nigerian economy in 2019 hangs precariously on the tailspin of fluctuations in global price of crude oil.
On its two interventions in the new year, the apex bank injected $420 million, $210 million each, and with its spate of financial market liquidity mop ups, the regulator is expected to overshoot $500 million monthly average projection by Coronation Research.
In its 2019 economic outlook report titled “A Tale of Two Halves,” Guy Czatoryski, Head of Coronation Research said “We think the CBN will supply dollars to the FX markets at an average rate of $500m per month during 2019. This is compatible with maintaining a strong reserve level.”
According to the researchers, the current rate of N365.29/$1, or close to it, is likely to prevail this year, adding that CBN is in a strong position to defend the rate with reserves at $43.0bn.
“We forecast an average $58.00/bbl for 2019. An average much below this means the CBN will have to keep rates very high and could even challenge the Naira / US dollar exchange argument. An average much about $60.00/bbl means the CBN will have confidence in its reserve position, and will be able to cut rates later in the year, in Q4, less likely Q3.”
Continuing in their report, the analysts added: “If, as we think, the oil prices will average US$58.00/bbl this year, then we think the CBN will want to keep interest rates high. It will do this through its open market operations (OMO). We think OMOs will be issued in a range of 17.00% to 19.00% and that T-bill rates will be very close to this level during 2019.
“We look at Nigeria in the international context of interest rates. Nigerian T-bill rates look competitive in the context of other emerging market rates – which is why the CBN is having success in attracting inflows of Foreign Portfolio Investment
“However, if oil trades at substantially above US$60.00/bbl during 2019 then foreign investors in T-bills will be encouraged and the CBN might well be in a position to cut rates in Q4 2019, or even in Q3 2019
“This could be helped by a downtrend in inflation. Inflation has proved stubborn and has trended at around 11.00 percent over the past few months. But if inflation trends, in 2019, towards the CBN’s target band of 6.00 percent to 9.00 percent, then it will help the CBN cut rates in order to stimulate the economy,” the analysts concluded.
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