February 14, 2022/CSL Research
The country’s foreign reserves have depreciated by 1.6% to US$39.87bn from US$40.52bn at the beginning of the year. While this could reflect the lagged effects of the higher oil prices, as Nigeria’s crude oil receipts are not spot delivered, we believe increased intervention by the CBN at both the spot and forward markets in January may also have increased pressure on the reserve. Also, the gains from higher crude oil prices remain capped by low production. The country’s reserves increased by 14.5% in 2021 from US$35.37bn in 2020, thanks to higher oil prices, proceeds from Eurobonds issuances and inflows from the Special Drawing Right (SDR) allocation.
The continued decline in the reserves could limit the ability of the Central Bank to keep up with its interventionist policy in the foreign exchange market, underpinning the rationale behind exploring new ways of managing foreign exchange risk. A recent plan communicated by the CBN governor is the RT200 FX Programme which, if properly implemented, should improve non-oil exports and boost FX accretion. Meanwhile, the naira has lost N0.67 against the dollar at the I&E window to close at N416.00/$ on Friday, 11 February from its opening rate of N415.33/$ at the start of February. In our view, the CBN is unlikely to ramp up intervention to pre-pandemic levels in the near term as inflows remain tepid.
Theoretically, the continued uptrend in crude oil prices, a major source of foreign exchange to the country, suggests FX accretion. However, the perennial issue of terminal shutdowns, vandalism, and thefts continue to fuel sub-optimal oil output despite the relaxation of OPEC+ production agreements. We project the FX reserves to deplete to US$35bn by the end of 2022, translating to goods and services import cover of 5.4x. Though there are speculations that the government may return to the Eurobond market in the year, however, we believe the external financing conditions are not favourable due to the gradual global interest rate normalisation and lower liquidity which makes it more expensive for the government to issue Eurobonds.
