October 8, 2021/Proshare

by FBNQuest Research 

Our chart today shows an uptick of USD2.8bn in gross official reserves to USD36.8bn in September. For a more accurate picture, we must adjust this gross figure for the pipeline of delayed external payments estimated at +/- USD3bn. Total reserves at end-July covered 8.8 months’ merchandise imports on the basis of the balance of payments for the 12 months to March ’21, and 6.8 months when we add services. The current reserves level is reasonably satisfactory. We expect to see a further increase in the short term particularly in the light of the recently completed Eurobond issuance and rising oil prices. 

The FGN’s return to the Eurobond market last month was very successful. The order book peaked at USD12.2bn which enabled the government raise USD4bn – USD1bn more than the USD3bn initially announced – in 3 tranches of 7-year bonds (USD1.25bn at 6.125%), 12-year bonds (USD1.5bn at 7.375%), and 30-year bonds (USD1.25bn at 8.250%). As we have noted previously, Nigeria’s gross reserves are calculated on a 30-day moving average basis; as such, we expect to see the Eurobond proceeds steadily boost the reserves in the coming weeks.

We recall that the National Assembly approved a USD6.2bn external borrowing plan for the year. So far, only USD4bn has been raised.  Given the complexities of conditionality, the prospect for multilateral financing is not very strong. This has led to speculation that the FGN may seek to raise USD2.2bn via the capital market for the second time this year. A second Eurobond issue is possible given that Egypt has also tapped the Eurobond market twice this year already (in February and September) to raise a total of USD6.8bn. 

Although higher oil prices should be positive for most oil-producing nations, given Nigeria’s limited production capacity, we do not expect Nigeria to reap the full advantages. According to OPEC figures, Nigeria’s oil output fell 7% m/m to 1.2mbpd in August, below its production quota of 1.55mbpd.

Gross official reserves (USD bn)

Sources: CBN; South African Reserve Bank (SARB); Central Bank of Egypt (CBE); FBNQuest Capital Research 

Assuming the FGN somehow raises the additional USD2.2bn, we see reserves at +/- USD40bn by year-end, barring any large outflows.