From a record USD6.95 billion deficit reported in Q4-19, Nigeria’s Current Account (CA) deficit shrank by 29.8% q/q to USD4.88 billion over Q1-20.
When viewed as a percentage of GDP, this translates to -1.3%.
The blend of a marked reduction across Trade (-70.6% q/q), Service (-16.0% q/q), and Income (-11.62% q/q) net debit positions supported the slight recovery in Nigeria’s external sector.
This performance is amid a 12.0% q/q decline in the current transfer.
Although exports fell by 14.9% q/q, driven by lower crude oil earnings (-17.4% q/q), a steeper decline in imports (-19.8% q/q) was enough to lift the trade balance in the period.
We believe that the institution of lockdowns by the FGN, especially at the twilight of the quarter, discouraged both goods and service imports, which was positive for the overall CA picture.
Elsewhere, Nigeria’s net financial account position printed net debit of USD6.3 billion, the first negative outturn since Q2-19.
The outturn was on account of the combination of a faster pace of net portfolio outflows (+38.0% q/q) and the reported net debit position in the other investment liabilities line (USD1.2 billion).
While the CBN recorded a net error and omission of USD11.18 billion, we believe the bank must have partly plugged the balance of payment gap with (1) the re-alignment of the naira (-17.7%) and (2) FX reserves drawdown (c. USD3.27 billion).
For the rest of the year, we expect the CA deficit to settle at USD10.68 billion (2019: USD17.02), translating to -3.0% of GDP (nominal).
In our opinion, the blend of a deteriorating CA picture, currency mispricing, and the growing premium between official and parallel rates connote that the odds are stacked against the naira.