Analysts see Nigeria’s reserves reach $35bn on oil price rally

• FSDH‭, ‬United Capital optimistic of sustained‭ ‬growth after Eurobond issuance

A positive global market oil price rally, currently above $70 per barrel, has set up Nigeria’s gross external reserves on a possible growth path that analysts say could head above the $35 billion mark by the close of the year, should the rally be sustained.

Recent data collated from the CBN and analyzed by Business A.M., show that Nigeria’s external reserves have for the first time since April 2021, crept to $33.54 billion at the start of August despite shedding about $1.5 billion since April due to pressures induced by the currency market on the back of continued interventions by the Central Bank of Nigeria (CBN).

The gross external reserves could be seen making an accretion after so much pressure, coupled with the recent decision by the apex bank to suspend sale of foreign exchange to the Bureau De Change (BDC) operators, and immediately directing banks to take up the responsibility of facilitating FX sales to Nigerians in need of FX for items not included in the list of 44 items banned by the CBN, as well as for the facilitation of Business Travel allowances (BTA) and Personal Travel allowances (PTA), amongst other things.

The foreign reserves have maintained a relatively stronger position at above $33.3 billion compared to its $26.5 billion positions in 2016 when the same decision was taken by the apex bank.

But analysts have cautioned against any euphoria from the gradually rising reserves, noting that there is a renewed loss of confidence in the Nigerian market by foreign investors.

At the end of July this year, the National Bureau of Statistics (NBS) Nigeria, in a report, disclosed that there was a sharp 61.1 percent year on year contraction in foreign capital flows to $2.9 billion through foreign direct investments (FDI), foreign portfolio investments (FPI), and other investments channels in the first half of 2021 as foreign investors shun Nigeria due to currency risk. This, by implication, say economic analysts, could hurt the foreign reserves and the recovery drive of the economy over the medium-term.

With divergence in the foreign exchange market, amid liquidity issues, which has remained unresolved, Nigeria’s foreign reserves slid to $33.3 billion as at 29 June as the CBN moved to meet a backlog of forex demands from 2020, estimated by the World Bank to be in the region of $2 billion.

The parallel market rates continued to be pressured amid weak intervention from the CBN in the market, with the local currency still finding footing for a smooth recovery against the dollar and other major currencies.

Finance and economic analysts have noted that the CBN moved to harmonise the Investors’ & Exporters’ window rate and the official market rate to N411 per dollar in a bid to implement a fairer exchange rate regime.

Undoubtedly, they said, the widening spread between official, I&E and parallel markets reflects renewed FX liquidity chomp.

United Capital Research analysts assert that the attempt of the federal government to borrow from the international debt market and sustained positive momentum of oil prices in the market could further strengthen Nigeria’s gross reserves in the third quarter of 2021.

But they also maintained that the apex bank is likely to stay reluctant in its significant forex market interventions pending the period the external reserves cross the $40 billion mark.

The year has been a relatively straightforward year for oil prices, followed by the effective rollout of vaccines and easing of restrictions in OECD nations. However, oil prices have averaged $65.2 per barrel in the first half of 2021, climbing 54.6 percent year on year from $42.4 per barrel in the corresponding period of 2020.

Similarly, OPEC+ members have continued their monthly meetings to set output targets to balance the crude oil market, which has thus far seen the market rebalancing exercise paying dividends. This, joined with the unrelenting economic recovery, has driven optimism in the oil market.

But, following the recent surge in crude prices, the landing cost of petroleum products into Nigeria has skyrocketed, implying an additional subsidy burden on the federal government after it announced it had taken up again the payment of subsidies to keep PMS at N162 per litre.

The subsidy programme is expected to last for six months (till October 2021).  United Capital Research analysts note that the rising cost of these subsidies, which are estimated at over N100 billion per month, continues to weigh on the government’s finances.

Thus, they also asserted that the federal government’s decision on whether to totally remove, partially remove or keep the subsidy payments will be critical to watch, given the expected impact on inflation and the government’s fiscal position.

On the other hand, oil prices have averaged $72 per barrel so far in the first seven months of 2021, and thus, above the 2021 budget benchmark of $40 per barrel which has now been reviewed to around $54 and $58 per barrel, which should imply an inflow into the excess crude account.

The foreign reserves, which was standing at $34.88 billion at the end of April 2021 got depleted in the space of four months by around $1.54 billion by the start of August 2021, but a positive rally has been recorded so far. It is worthy of note, as some analysts have projected, that the external reserves are expected to strengthen in the third quarter of 2021 and as the demand for oil surges, some hope can still be kept alive that improved dollar inflows will begin to trickle into the reserves.

At the last Monetary Policy Committee meeting, Godwin Emefiele, the CBN Governor, speaking on the marginal increase in external reserves to $33.83 billion as of the 22 of July, said it is a reflection of upticks in the crude oil prices and other measures by the apex bank at cushioning the effects of the pandemic despite its continued interventions in the foreign exchange market. But some experts have averred that the rally in the crude oil market had not filtered into the market’s external reserves yet as the market is a futures market.

According to the debt management office (DMO) some weeks ago, the $500 million Eurobond issued in January this year, contributed to the accretion in Nigeria’s external reserves.

The debt office has also announced plans by the FG to further go to the international capital market this quarter which has also been noted by economic experts as capable of providing some relief in the market and boosting external reserves in the short term.

A macroeconomic scenario painted by economic analysts at FSDH Capital Research in a research note made available to business A.M. forecast that in 2021:

“Nigeria’s external reserves will average $34 billion as the exchange rate is quoted at N430 to the greenback and positive growth in the national output by 1.3 percent as the economy recovers moderately and embraces the new normal while the price of crude oil averaged $45 per barrel.

That said, as the economy opens up and the government fully implements interventions to stimulate the economy, the external reserves will climb to $38 billion on a best-case scenario if the exchange rate stays at N380 to the dollar, oil price rises significantly above $53 per barrel and the demand for Nigerian crude improves as economies recover while Nigeria produces 1.9 million barrels per day.”

As economic actions pick up across sectors, there is an expectation of enhanced economic recovery in later quarters. Still, the need to continue attracting capital inflows to boost foreign reserves, support the budget and ensure exchange rate stability will remain a key concern for both the fiscal and monetary authorities.