EUR 4.00 For Business Accounts Only

Nigeria Strategy Report H1 2019 Excerpts - Currency - A test of nerves and resilience

• In this session, we continue discussion with the domestic section of our core strategy document – the Nigeria Strategy Report. In this segment, we focus on the major themes that dominated the foreign exchange market in 2018, highlighting our views as well as our outlook for pull and drag of foreign exchange flows over 2019.
• In our H2 18 Nigeria Strategy Report, we modeled the impact of capital flight and lower portfolio flows due to political uncertainty, and thus projected a $1.9 billion drawdown in the external reserve over the 2nd half of 2018 relative to a $7.8 billion accretion recorded in H1 18. True to our words, but at a greater scale, Nigeria’s external reserve took a plunge over H2 18 with a depletion of $3.9 billion.  Consequently, the external reserve’s position closed the year at $43.2 billion, lower than our estimate of $45.7 billion. The marked drawdown stemmed largely from an enlarged repatriation of maturing fixed income instruments held by offshore investors, which we estimate at 30% of outstanding instruments. The sizable repatriation and paucity of flows at the Investors and Exporters Window (IEW), prompted the Central Bank of Nigeria (CBN) to stepped up its intervention over H2 18 across markets compared to H1 18 with overall intervention printing at $26.5 billion. Consequently, the NAFEX, BDC and parallel rates remained relatively stable over H2 18, closing the period at N363.2/$1, N362.3/$1, and N363.7/$1 accordingly.
• With our model suggesting cumulative slower CBN intervention over 2019 to the tune of $53 billion (3% lower YoY), we estimate average monthly sale of $4.5 billion (vs. $4.7 billion in 2018). Coalescing this with our estimate of average oil and non-oil inflows to the apex bank, we estimate monthly average reserve drawdown of $431 million which summed up to $5.2 billion over 2019 relative to $3.7 billion accretion in 2018. The foregoing would exert some pressure on the foreign reserve to close 2019 at $38.5 billion ($41.2 billion if adjusted for the proposed $2.7 billion Eurobond). While this suggest a comfortable position for the apex bank and the naira, we believe the distorted interplay of demand and supply at the IEW and the increased demand at same would drive short term volatility in rates and an eventual adjustment to our fundamental driven purchasing power parity (PPP) estimate of between N397.61/$ to N401.50/$ (8-10% down-leg from current NAFEX rate of N362.00/$ at the end of December 2018).