Nigeria’s reserves, FX pressure to ease on $3.4bn IMF’s SDR, $6.2bn Eurobond 

Nigeria could be in for a short to medium term easing of the twin pressures that have laid siege on its external reserves and its foreign exchange holdings and markets over the last few years with the imminent release by the International Monetary Fund (IMF) of its share of special drawing rights (SDR) and a fourth quarter plan by its Debt Management Office (DMO) to issue Eurobonds in the international debt capital market, a consensus of analysts across the domestic finance and investment community told Business A.M. over the weekend, expressing what they see as a huge relief ahead for the economy.

The International Monetary Fund’s (IMF) $650 billion in special drawing rights worth of SDR456 billion  are being disbursed to the most vulnerable countries to help address the long term global needs for reserves during what has been termed the worst crisis in a century. It is also expected to help these low-income countries strengthen their response to the COVID-19 crisis following approval by the IMF’s board of governors. Nigeria, which is expected to get an estimated $3.35 billion in SDR allocation and entitlement from the amount, this may bring a cushion to her ailing and depleting external reserves, say analysts.

Based on this estimated $3.35 billion allocation to Nigeria, as well as the proposed $6.2 billion or N2.3 trillion worth of Eurobond issuance expected to be concluded in early fourth quarter of 2021, championed as a means of covering part of the 2021 budget deficit of N6.8 trillion, analysts at United Capital Research assert that the SDR allocation will help strengthen Nigeria’s gross external reserves and also help the Central Bank of Nigeria (CBN) sustain interventions in the domestic foreign exchange market, which has come under much pressure recently.

“Given these events by the IMF and FG to float Eurobond in the market, we expect external inflows worth almost $10 billion would provide a significant boost to the reserves. Although, we do not expect the apex bank to draw down the SDR allocation immediately. Accordingly, this would strengthen the ability of the Central Bank of Nigeria (CBN) to sustain interventions in the FX market.

“Ultimately, this will help the CBN achieve its goal of lowering pressure on the exchange rate as improved FX liquidity drains demand at the parallel market, forcing a possible convergence with the official exchange rate. Given this expectation, we project inflationary pressures will subside; barring major shocks like removal of fuel subsidy, considering a decent chunk of inflationary pressure is FX-linked,” they noted.

The economic domino effect of the coronavirus pandemic has aggravated existing strains on a number of African sovereigns, including Zambia, Chad and Ethiopia; with all seeking for services on their debt burdens. However, Nigeria’s case may not be regarded as too bad despite the rising debt burden of her federal and subnational governments, respectively.

But Nigeria will find the inflows useful, especially flows from the IMF’s SDR allocations, plus the Eurobond issuance. Both will facilitate the budget deficit funding as well as pulling her out of low reserves accumulation.

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), in a statement said the allocations to several countries will provide additional liquidity to the global economic system and if well utilized will be a significant shot in the arm for the world and will provide a unique opportunity to combat this unprecedented crisis of COVID-19.

“The SDR allocation will provide additional liquidity to the global economic system, helping to supplement countries’ foreign exchange reserves and reducing their reliance on more expensive domestic or external debt. Countries can use the space provided by the SDR allocation to support their economies and step up their fight against the crisis.

“SDRs are being distributed to countries in proportion to their quota shares in the IMF. This means about $275 billion is going to emerging and developing countries, of which low-income countries will receive about $21 billion which is equivalent to as much as 6 percent of GDP in some cases,” Georgieva said.

SDRs are issued to members by the IMF and are a reserve asset that can be exchanged for a convertible currency with a central bank. It is an international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries. Under its Articles of Agreement, the IMF may allocate SDRs to member countries who are participants of the SDR Department in proportion to their IMF quotas. Still, the SDR will particularly help the most vulnerable countries struggling with the pandemic crisis.

Impacts, hopes of Eurobond, SDRs for Nigeria

In a related matter, the Debt Management Office (DMO), at the start of August, announced the appointment of transaction advisers, local bookrunner and legal advisor, respectively, by the federal executive council (FEC) to help accelerate activities towards the issuance of the Eurobonds this year.

The announcement was in compliance with Nigeria’s Debt Management Office (Establishment Act of 2003) and the Fiscal Responsibility Act of 2003 which has been secured.

Experts conversant with how these types of transactions work, have noted that the proceeds from the issue will result in an inflow of foreign exchange which in turn, will increase Nigeria’s external reserves and support the Naira exchange rate.

Nigeria had initially planned a Eurobond issue earlier in 2020 after the last one it did in 2018 where it raised $2.86 billion. The federal government is, therefore, anxiously looking forward to the success of this debt raise as it is hoping to finance the 2021 budget deficit of N5.6 trillion largely from foreign and local borrowings, and we are now entering the first week in September.

Meanwhile, according to CBN data obtained by Business A.M., Nigeria’s gross external reserves printed at $33.40 billion as of Tuesday August 24 after it initially crept to $33.54 billion at the start of August despite shedding about $1.5 billion since April due to pressures emanating from the currency market on the back of continued interventions by the Central Bank of Nigeria (CBN).

Nevertheless, some highly optimistic analysts have projected that Nigeria’s gross external reserves may be on its way to a range of above $35 billion by the close of the year should the rally in the price of oil be sustained.

They note that if you add successful borrowing rounds from the international debt market to a sustained positive momentum in oil prices in the international market, this could further strengthen the country’s gross reserves in 2021.

However, experts in the workings of the Nigerian economy have calculated that the inflow from the IMF will boost Nigeria’s foreign reserves to around $43 billion in 2021, and that this will largely support the efforts of the apex bank in foreign exchange liquidity management.

For instance, CSL Securities’ analysts noted that, “The Eurobond inflow, together with the Special Drawing Right (SDR) of US$3.4 billion allocations from IMF should support FX accretion to about $43 billion and support CBN’s efforts at managing FX liquidity.”

While foreign exchange has been in short supply during life under Covid-19, Nigerians have made limited use of their education, health and business travel allowances due to restrictions on movement both at home and in their favoured destination countries.

Moreover, experts believe that the CBN will reduce its frequency of liquidity mop-ups as inflationary pressures and FX speculations become less of a worry. This expert consensus is that, “this could reintroduce a decent level of liquidity, pushing deposit rates lower.  And as yields are expected to crash in the markets, domestic equity investors will be on the hunt for high-dividend yield stocks, sparking a possible late rally.”

They add that with the expectations of rates sliding in the debt market, the government will no longer be overly reliant on the domestic debt market.