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NSR H1 2021 Excerpts - Currency - An FX Crisis?

Nigeria Strategy Report – H1 2021 Excerpts

Domestic Economy and Markets

• In today’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 2020 as well as our outlook for pull and drag on foreign exchange flows over 2021.
• Whilst the Central Bank of Nigeria (CBN) tried to stabilize currency rates in H2:2020, the Naira depreciated across various FX windows, as the parallel market rate fell by 23.61% to N445/$1. In the I&E FX window, the Naira depreciated by 12.46% to close at N410.25/$1, driven by demand pressures from both manufacturers and investors. The CBN also made further adjustment to the official rate as it was adjusted from N306/$1 to N360/$1 in March, then moved to N379/$1 in August. As the twin shocks of the COVID-19 pandemic and low oil prices hit the Nigerian economy, the CBN’s ability to intervene and hold the Naira stable was impaired. In the year, limited inflows were reflected on external reserves as it depleted by $3.22 billion (-8.35%) in 2020 (depleted by 2.24% in H2:2020) to settle at N35.37 billion. The reserves only fell by $811.36 million in the second half of 2020 reflecting the $3.4 billion and $1.5 billion inflows from the IMF and World Bank in the year.
• As the pressure mounts on Nigeria’s FX position following the global pandemic and low oil prices, the reserves are expected to still be supported by swaps and external financing in the form of loans in H1:2021. That said, we estimate gross revenue to close at $32.41 billion in the first half of the year and close at $28.79 billion by the year’s end. We point out the CBN’s option to issue instruments (i.e., Eurobonds) at the debt market to support the reserves. This does not factor into our forecast for FX reserves.
• From the exchange rate perspective, although the pressure on net flows is expected to linger in 2021, we expect that its cushioned with expectations of improved oil receipts in the year. We recall that prior to the blow from COVID-19 and low oil prices, the CBN was insistent on sustaining the naira, pegging the red line for FX reserves at $30 billion. With reserves currently above $35 billion, oil prices looking up, and hopes for a positive impact of the COVID-19 vaccine strengthen, we envisage that the CBN will manage the naira within N379 – N410/$1 in 2021.