External Reserves fall to 20-Month Low

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), the nation’s external reserve is projected to fall this month to the lowest in 20 months, since January 2018.

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.

Data from the CBN showed that the reserve fell to $41. 742 billion on Thursday last week (October 3rd) from $42.051 billion on Thursday of the previous week (September 24th), indicating week-on-week decline of $309 million dollars.

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 a chart with news men, 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.

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