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NSR H1 2020 Excerpts - Currency - How long can the CBN keep up?

• In this evening’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated the foreign exchange market in H2 2019 as well as our outlook for pull and drag of foreign exchange flows over 2020.

 

• Across the various windows, the naira remained stable over H2 2019. Particularly, the BDC and parallel rates held steady at N359/$1 and N360.5/$1 respectively, while the NAFEX rate depreciated slightly by 1% to N364.2/$1. Once again, the apex bank continued to manage stability of the naira despite significant pressures faced over H2 19. For clarity, events in the FX space took a turn around over the second half as foreign inflows slowed together with exodus of foreign flows over same period. In turn, CBN became a net seller at the IEW, net selling $4.7 billion over H2 2019 compared to a net purchase of $6.0 billion in H1 2019. Overall, the FX reserve was depleted by $6.5 billion over H2 19 compared to an accretion of $2.2 billion over the first half.

 

• Despite calls for a devaluation in the naira, the CBN has continued to hold tightly unto the naira. We think as pressure continues to mount on the CBN, the apex bank might have to give in. However, we do not see that happening in 2020. Over H1 2020, we expect further depletion in the reserve to the tune of $4.1 billion and another $2.9 billion over the second half to close 2020 at $31 billion. Particularly, while we expect a moderation in outflows over H1 20, we anticipate a faster moderation in inflows on the back of lower oil price and depressed FPI inflows. Irrespective, we think the CBN will continue to manage the naira at current level of N360 – 365/$ given the position of our FX reserve projection. For emphasis, the apex bank has hinted it will maintain the naira at current level as long as the FX reserve remains above $30 billion. That said, our estimates exclude a possible Eurobond issuance or/and multilateral financing over the year. We think the FG could raise as much as $3 billion from the international market, which should further shore up the reserves.