EUR 3.58 For Business Accounts Only

Alarm bells as current account surplus narrows again

• Higher import and service deficit surge trim surplus: The blue ink in Nigeria’s current account (CA) narrowed from a surplus of $2.7 billion in Q1 2017 to $1.4 billion in the second quarter - the second consecutive QoQ contraction in CA surplus since the turn of the year. This was largely reflective of decline in trade surplus and, more importantly, sharp jumps in services and income deficits in the period. On the goods (trade) front, with exports displaying a much tamer QoQ growth of 8.5% , an over 13% FX liquidity-induced jump in imports easily shrank the country’s trade surplus to $2.1 billion in Q2 17 (vs. $2.3 billion in the first quarter of the year).
• Away from our concerns on narrowing goods balance, recent developments on the services  and income fronts also inspired less confidence. Precisely, cumulative deficits across both segments expanded 42% QoQ to $6.1 billion in Q2 17 to largely nullify milder growth in current transfers and leave the country’s CA surplus 48% lower relative to Q1 17 levels. In view of these, the ratio of CA surplus to GDP declined 28bps QoQ to 2.4% in Q2 17.
• Elsewhere in the balance of payment data, CBN numbers indicated improvements in financial account—the segment which records the net financial flows into the country. Precisely, the country’s financial account expanded over three-fold QoQ to $4.3 billion largely reflecting slower decline in cash reserve (-90% QoQ to $299 million) and increases in other investments (such as trade credits and loans), FPI and FDI.
• Rising imports and services deficits to trim current account surplus: Going forward, we expect crude export to ride gains from the first full quarter of Forcados re-opening in the current quarter. However, FX liquidity-induced jump in imports is expected to extend the moderation in goods balance. Overlaying the implied goods trade surplus with target services and income deficits of $3.6 billion and $3.2 billion (respectively 4.1% and 3.6% of forecast Q3 16 GDP) as well as net current transfers of $6.2 billion, we expect the country’s CA to print at $1.36 billion and 1.5% of GDP in Q3 17.
• On the financial account, we expect a combination elevated interest rate environment, improving economic picture and a flexible exchange rate system to sustain the demand for naira assets over the coming months. Overall, despite expected moderation in current account surplus, the still positive balance of payment picture suggests little downside risk for the naira in the near term.
•  See attached for full report