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NSR H2 2020 Excerpts - Currency - Calm before a storm?

• Once again, events over H1 2020 revealed the apex bank’s vulnerability to external shocks. With FPI inflows and oil receipts jointly accounting for c.50% of CBN’s FX inflows, the twin shock of covid-19 pandemic and lower oil price posed a threat to the FX reserves. While we expected the CBN to give in to mounting pressures on the reserve, we didn’t envisage that happening this year. Nonetheless, the tide turned following the unexpected outbreak of covid-19 pandemic, resulting in a slump in oil price and inflows (both oil and non-oil). With limited string to its bow, the CBN was forced to adjust the tightly held official rate from N306/$1 to N360/$1. In addition, rates at the IEW were revised higher to a maximum of N380/$1 from an average of N360/$1. Similarly, average rate at the parallel market depreciated by 19.8% YTD to N455/$1. However, the reserves only depleted by $2.4 billion over H1 20 reflecting $3.4 billion and $278 million inflows from IMF and AfDB respectively. Meanwhile average import cover expanded to 9.2x compared to 7.9x in H2 2019 largely reflecting the faster decline in imports.
• Going into the rest of the year, despite CBN’s administrative controls, we expect further depletion in the FX reserves on the back of lower inflows. While the $3.4 billion IMF loan facility will provide a temporary relief, the CBN would be counting on disbursement of facilities from AfDB and World Bank. Overall, we forecast a depletion of $7.8 billion over H2 20 with the FX reserve closing the year at $28.8 billion. That said, our estimate excludes expected inflow from World Bank ($1.5 billion) and AfDB ($222 million). Including these inflows to our model will take the reserves to circa $32 billion by year end. Given our expected level of reserve relative to CBN’s proclaimed comfort level of $30 billion, we see limited downside in FX rates over the rest of the year. Downside risk to our forecast are: (i) A second wave of the virus, resulting into economies closing longer than expected (ii) crude oil price going lower than anticipated ($27.5/bbl).

 

Ex the multilateral inflows, the reserve would have been depleted by $6.1 billion.