April 22, 2021/United Capital Research
Following two consecutive months of decline in gross external reserves (down 3.3% or $1.2bn m/m in Feb-2021 and down 0.8% or $279.4m in Mar-2021), gross reserves appear to be trotting higher in April, climbing 1.1% MTD or $398.4m. Year-to-Date, gross external reserves remain down by 0.4% or $155.1m. The rebound in external reserves reflects the impact of the rally in crude oil prices in recent months, with Brent crude gaining 28.5% YTD.
As we have highlighted in our prior communications, the rally in the crude oil market had not filtered into the market’s external reserves as the market is a futures market. Thus, the improved dollar inflows are beginning to trickle into the reserves.
Going forward, we expect the impact of higher crude prices to continue over the coming months. In addition, we expect this to be further aided by the FG’s plan to issue Eurobonds as part of its debt program for 2021. We recall that as part of the 2021 budget, the FG announced plans to borrow N2.1tn (estimated at $5.5bn using the official exchange rate) from the international debt market. While we do not anticipate Eurobond issuance of this magnitude, we expect the FG to attempt raising a similar $3.3bn it planned to raise last year while funding the rest via multilateral sources. In our opinion, it could further strengthen gross reserves in Q3-2021.
Lastly, we think this bodes well for the FX market, thus improving FX liquidity conditions. That said, we believe the CBN will remain reluctant in resuming significant interventions in the FX market until the external reserves cross the $40.0bn mark.
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