Nigeria’s External Reserves Plunge to 21-Month Low

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Pressured by the impact of volatility in the price of crude oil, slow down in dollar inflows from foreign portfolio investors (FPIs), as well as increased dollar sales by the Central Bank of Nigeria (CBN), Nigeria’s External Reserves plunged to $40.3 billion as at October 18, 2019. This is the first time in almost two years that the nation’s external reserves would decline to $40.3 billion.

According to data obtained from the CBN, Nigeria’s external reserves dropped from $45 billion in July to $40.3 billion in October 18 2019. This suggests the country’s external reserves has depleted by $5 billion in less than four months. The CBN’s reserves is now at a 21 months low.

The reserve which fell by $3.22 billion in the third quarter 2019 (Q3’19) to $41.852 billion at the end of September 2109 from $45.074 billion at the end of June, continued its downward trend in the first three days of this month.

Downward trend
Analysts projected that the downward trend which started from $45.149 billion on July 5th will likely persist this month, with the possibility of touching the $40 billion mark.

Highlighting factors that will impact the reserve this month in his monthly economic review at the Lagos Business School, Chief Executive Officer, Financial Derivative Company Limited, Mr. Bismack Rewane said, “Demand for dollars will increase in the coming month due to inventory build up ahead of Christmas and this will mount pressure on external reserve, hence gross external reserve level may decline to $40 billion.”

In an interview with Financial Vanguard, he said, “I am cautiously optimistic that the reserve will stay above $41 billion this month because when it falls below $41 billion everybody begins to panic.”

Speaking similarly, Ayo Akinwunmi of Corporate Banking, FSDH Merchant Bank, said that “the direction of the reserve in October is unpredictable. However if it continues to decline the way it did between August and September, when it fell by about $3 billion, it may go below $40 billion by the end of this month. And as the reserves drop, foreign portfolio investors will be hesitant to bring in their money and this will further reduce accretion to the reserve.”

He noted that while FPIs still find the Nigerian market attractive due to the huge difference between yields on the one year Treasury Bill (TB) in United States and Nigeria which, for now, over compensate for the risk of devaluation, further fall in the reserves below $40 billion may however trigger serious concerns among the FPIs.

These concerns are reinforced by the 41 percent decline (quarter-on-quarter) in FPI investment in TBs in the second quarter (Q2’19) of the year to $3.5 billion from $5.9 billion in Q1’19.

The sharp decline led to 40 percent decline (q/q) in total FPI inflow in Q2’19, to $4.29 billion in Q2’19 from $7.1 billion in Q1’19.

Naira suffers first depreciation in 7wks

Reflecting apprehension over the continued decline in the nation’s external reserves, especially among FPIs, the Naira suffered its first depreciation in seven weeks in the Investors and Exporters (I&E) window last week.

Data from FMDQ showed that the indicative exchange rate of the window rose to N362.77 per dollar last week from N362.02 per dollar the previous week, translating to 77 kobo depreciation.

Prior to last week, the Naira appreciated persistently against the dollar for six weeks, when the I&E window exchange rate dropped from N363.44 per dollar on August 9th to N362.02 on September 27th.

The resulting N1.42 appreciation was fuelled by increased dollar sales by the CBN in the I&E window in a bid to reverse the N2.65 depreciation suffered by the Naira against the dollar between July 12th and August 15th, when the I&E window rose to N363.44 per dollar from N360.79 per dollar, due to increased dollar demand by FPI exiting the nation’s fixed income market.

The depreciation suffered by the Naira last week, according to analysts at Lagos based Cowry Assets Management Company, will persist this week, citing apprehension over declining external reserves. “In the new week, we expect depreciation of the Naira against the dollar across the market segments amid decreasing external reserves”, they said.

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