Devaluation calls loom as reserves fall below $40 billion
• Nigeria faces ‘busy’ week with data, policy decision
• Foreign investments fall by eight percent
Nigeria’s foreign exchange reserves fell below $40 billion for the first time in 23 months, as the country’s crude oil earnings remain under pressure in the international market, while the apex bank sustains its currency defence efforts. While the yields on fixed-income securities have relatively been pressured in recent times, the monetary authorities may need to tweak the rates to attract foreign investors, to shore up the depleted reserves.
The falling reserves at $39.8 billion fell by about $7billion in the 23-month period, after rising to about $47 billion, but now raising concerns with uncertainty around the crude oil price – Nigeria’s major foreign exchange earner, and may soon cause panic demand by investors, causing a renewed exchange rate pressure.
Meanwhile, it would be a busy week for the policymakers and the economy, as the Monetary Policy Committee of the Central Bank of Nigeria (CBN), digests the meaning of the third quarter (Q3) growth at 2.28 percent, current account balance for Q3, and inflation trends, to reach a decision on benchmark interest rate today. Specifically, the report on Gross Domestic Product (GDP) in Q3, showed that despite a positive contribution from the non-oil sector, it was still weak.
A Senior Research Analyst at FXTM, Lukman Otunuga, said the nation recorded a current account deficit of $2.9 billion during the second quarter of 2019.“While a deficit is not necessarily bad, it does suggest that a country’s liabilities exceed its foreign assets. Given how Nigeria imports more than it exports, there is a risk of the nation experiencing another deficit in Q3 – an outcome that could prompt foreign investors to call for Naira devaluation.
“There will be a strong focus on the interest rate decision on Tuesday (today). Given how inflationary pressures are making an unwelcome return, the CBN may think twice before cutting interest rates from 13.5 percent.“Should the CBN governor adopt a cautious tone and express concerns over the Nigerian economy, investors may re-evaluate the possibility of monetary policy easing during the first half of 2020,” he said.
Similarly, data from the Nigeria Bureau of Statistics (NBS), showed that total value of capital importation into Nigeria stood at $5.37 billion in Q3 2019, representing a decrease of 7.78 percent compared to Q2, and 87.99 percent increase compared to Q3 2018.
The development affirms the decreasing inflow of Foreign Direct Investment (FDI), despite the country’s struggling export volume and value.The largest amount of capital importation by type was received through portfolio investment, which accounted for 55.88 per cent ($2,999.50million) of total capital importation, followed by Other Investment, which accounted for 40.39 per cent ($2.167.98million) of total capital, while FDI accounted for 3.73 percent ($200.08million) of total capital imported in Q3 2019.By sector, Capital importation by banking dominated Q3 2019, reaching $1.76 billion of the total capital importation.
The United Kingdom emerged as the top source of capital investment in Nigeria in the quarter with $2,011.14 million. This accounted for 37.47 percent of the total capital inflow. By Destination of Investment, Lagos State emerged the top destination of capital investment in Nigeria in the review period with $4,976.40 million, accounting for 92.71 percent of the total capital inflow. By Bank, Stanbic IBTC Bank Plc emerged top of capital investment in Nigeria, with $1,630.91 million, and accounted for 30.38 percent of the total capital inflow in Q3.
Across sub-Saharan Africa, central banks in the key economies are also busy in the week, and are expected to diverge on policy when they make interest-rate calls, as some seek to tame inflation, while others want to boost growth. In a Bloomberg report, factors outside the usual ambit of monetary policy committees will also influence their calls, noting that since these policymakers last met, a deteriorating fiscal outlook in South Africa placed it one step closer to a full house of junk credit ratings. Also, Ghana raised its budget-deficit forecast; and Kenya scrapped a controversial law that capped interest rates.
“Where external liquidity is weak, or foreign-currency stability threatened, we expect central banks to either tighten or at least remain on hold,” the Chief Economist for Africa and the Middle East at Standard Chartered Bank Plc, Razia Khan, said. Zambia’s Central Bank faces a choice between stemming inflation that’s at a three-year high and propping up production hit by rolling blackouts that last more than 15 hours a day. Nigeria’s Central Bank is likely keeping its rate on hold for a fourth meeting even as inflation jumped to a 17-month high, while the policymakers look for ways to jump-start an economy projected to grow just two percent this year.
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