• Foreign reserves hit new low
• Naira appreciates, still undervalued
Nigeria’s foreign exchange (forex) reserves remained under pressure as the country struggles with leftovers of previous forex management stance and anxieties over recent changes in forex policies.
Forex reserves dropped to $33.23 billion this weekend, its lowest in more than two years, since July 2021.
Naira, however, continued to show resilience, rising by 1.8 per cent to close weekend at N741.85 per dollar at the formal I & E Window.
The latest forex report came on the heels of the second quarter of 2023 report by the National Bureau of Statistics (NBS) showing that Nigeria’s total capital imports fell by nine per cent to $1 billion in second quarter 2023, compared with first quarter 2023.
Capital importation tracks offshore financial inflows, including credit and deposits as well as physical capital, by tracing banking transactions and Customs data.
Economists believe that foreign capital, workers’ remittances, and domestic savings are key sources of capital to drive long-term economic growth. Thus, capital importation serves as a barometer for gauging offshore investors’ perception of an economy.
The NBS report indicated foreign portfolio investments (FPIs) dropped by 83.5 per cent from first quarter 2023 to $106.9 million in second quarter 2023. This represented a paltry 2.5 per cent of the $4.3 billion recorded in pre-COVID-19 period of second quarter 2019.
But most analysts expected ongoing reforms to mitigate the forex situation and re-energise the country’s currency management.
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In its latest report, Managing Director, Financial Derivatives Company (FDC), Mr Bismarck Rewane, says while there might be no tangible appreciation of the naira until next year, there’s a strong level of optimism that the new leadership of the Central Bank of Nigeria (CBN) and the pro-market administration of President Bola Tinubu would gradually turn things around.
According to him, the economy is grappling with excruciating debt service, spiralling inflation, and tepid growth.
He noted that Nigeria’s gross external reserves remain a subject of controversy, while published data showed a gross external reserves position of $33.23 billion on a 30-day moving average basis, the backlog of unsettled forward contracts is estimated at $6.8 billion and airline-trapped funds are approximately $800 million.
“Therefore, it is baffling to see that our purchasing power parity (PPP) value of the naira is N735.53 per dollar, approximately 27 per cent above the parallel market rate. It shows that the naira is 1.3 per cent undervalued rather than overvalued.
“Some economists have questioned the logic and sanity of our analysis, but that is what the PPP analysis discloses as of September 30. We believe that the naira will appreciate to N900 per dollar before December if and only if, Nigeria comes clean with what its true external reserves minus its encumbrances are to the market.
“However, we do not expect any tangible appreciation of the naira until 2024. We are encouraged by the pedigree of the new CBN leadership that they will stop doing the dumb things and start doing some smart things. But those are necessary and not sufficient to salvage the decadence.
“We are confident that Nigeria will approach the markets to reschedule its inefficiently structured external debt and talk to the International Monetary Fund (IMF) about policy support after the World Bank meetings in Morocco. Some may ask, why borrow more money when you are up to your ears in debt?
“The answer is simply that mismanaged debts and liabilities with no tangible assets to show need to be followed by project-specific borrowing and proper governance going forward,” Rewane stated, in a weekend review.
Minister of Finance and Coordinating Minister for the Economy, Mr. Wale Edun, has confirmed that the country was engaging the World Bank to find the most concessional ways to support the forex crisis resolution.
Analysts at Afrinvest said they expected efforts by the Federal Government to strengthen bi-lateral and multi-lateral business relationships and attempts to effect some market reforms to inspire confidence should external factors align favourably before reform fatigue sets in.
Analysts noted it would be helpful to support short-term measure such as the $3 billion Afreximbank-NNPCL deal with steady improvements in market yields and inflation-arresting policies to present a compelling narrative for the naira.
“In our opinion, longer-term strategies should be focused on moving the economy from being hot-money reliant to foreign direct investment (FDI)-based,” Afrinvest stated.
Afrinvest, however, downgraded its capital importation estimates for the year from $6.2 billion to $4.8 billion, citing forex illiquidity, unrelenting inflation, need for firmer CBN guidance and yields expansion in Advanced markets.
Analysts also noted the need for improvements in the attractiveness of the sub-nationals to improve foreign inflows, pointing out that only five of the 36 states and the Federal capital Territory (FCT) attracted foreign investment flows in second quarter 2023, compared to nine states in first quarter.
Cordros Capital said the narratives in the forex market have remained the same in recent weeks due to perceived slowdown in forex reform momentum.
Analysts said lingering low crude oil production and a sustained dip in foreign investors’ net flows could continue to weigh on forex supply in the short term.
“Consequently, we expect forex liquidity constraints to linger in the near term, ensuring the local currency pressures remain intact,” Cordros Capital stated.