New crude collateralised deals to unlock $9.5 billion fresh inflow
As expected, the change in the leadership of the Nigerian National Petroleum Company Limited (NNPCL) and the release of the country’s net foreign exchange reserves (NFER) are changing the market tide.

JP Morgan, a leading global investment bank, is bullish on the economy in the short to medium term, saying it remains “top trade recommendation within frontier markets”.

In the face of rising global uncertainty, the bank maintained a positive stance on the market, which it said, is “insulated from the U.S. slowdowns”.

In its note to investors on Wednesday, JP Morgan said the Nigerian markets offered sufficient rate buffers to cushion potential short-lived foreign exchange losses.

“We recently rolled our maturing Nigeria T-bill trade into a new Nigeria OMO bill, as the carry trade worked well over the past year, and we expected it to continue performing well given potential imminent catalysts. Some of those catalysts have now materialised as the Central Bank of Nigeria (CBN) has now published net FX reserves while the President has replaced the board and management of the state-owned oil company, the NNPCL,” its report said.

It placed the NFER release as a short-term catalyst and the NNPCL leadership change as a medium-term catalyst. Less than 24 hours after the CBN released the much-awaited NFER, President Bola Tinubu, in the wee hours of Wednesday, replaced the Mele Kyari-led team at NNPCL – a decision widely commended.

JP Morgan considers the twin decision a confidence booster for a country that has been mired in FX and other macroeconomic challenges in recent years.
After the decision, the FX market, which witnessed significant anxiety in the last few weeks, has seen some stability, though causality may not have been established.

JP Morgan told its clients that the NFER was in line with expectations but cautioned that the CBN’s “commitment to improving quality of reserves should not be understated”.

The, which claimed that the net FX reserve was at a multi-year high, did publish detailed data of its short- and medium-term foreign liabilities. The insight, JP Morgan stated, would be a “significant step in the right direction”.

“This is in line with our broader view that the current government (and by extension the CBN) is, indeed, committed to a more market-friendly approach to policymaking,” the bank said.

The change in NNPCL management, it insisted, is a big step forward in the overall oil sector reform agenda, suggesting that a private sector-led NNPCL would complement other oil reform efforts, which it previously recommended.

‘While it may not result in a sharp increase in oil production in the near term, it should result in improved transparency and better flow of oil dollars to the government. For now, the current account surplus remains large, $17.5 billion last year, yet negative errors also remain large and limit the extent of FX reserve accumulation,” it noted.

It considered new NNPCL FX financing arrangements as the next catalyst that is expected to boost FX liquidity in the near term.

If the reported oil collateralised financing arrangements being negotiated by the NNPCL crystalise, JP Morgan projected, the NNPC could have up to $9.5 billion in new financing in the coming months, which could be used to clear arrears owed for petrol imports and boost FX reserve.

Naira has continued to screen as cheap both on our fundamental models and relative to reforms already implemented, it held, adding that “the central bank has kept FX spot elevated to aggressively improve the FX reserves picture.”

With the NFER release, it argued, the apex bank might “ease off aggressively absorbing inflows, which could result in USD/NGN moving moderately lower, declining to around 1450 by year-end.”