External reserves to hover below $46bn in June

THERE are indications that the nation’s external reserves will hover below the $46 billion mark this month following the slowdown in monthly accretion by 13 percent last month.

Financial analysis showed that the external reserves maintained upward trend in May rising to $45.109 billion from $44.792 billion in April. This represented increase (accretion) of $317 million in May, down by 13 percent compared to $364 million accretion recorded in April.

The $317 million accretion recorded in May also represented 85 percent decline when compared to the $2.13 billion accretion recorded in March. The slowdown in accretion to the reserves in May, especially in the face of high crude oil price, which stood at $75.76 per barrel as at May 17, indicates significant reduction in dollar inflow from foreign portfolio investors, FPIs, during the month.

Recall that the sharp accretion of $2.13 billion to the reserves in March was driven by increase in crude oil price and huge dollar injection by foreign portfolio investors, FPIs, seeking to take advantage of double digit interest rates on Nigeria’s fixed income instruments, namely treasury bills and FGN bonds, to maximise returns on their investment.

Analysts at FSDH Merchant Bank, however, had predicted that the huge inflow from FPIs recorded in March would not be sustained due to decline in yields in the fixed income market.

“We believe the increase in FPI was as a result of foreign investors’ interest in the Nigerian fixed income market on account of attractive yield and relatively stable exchange rate. “FSDH Research notes that the inflows may not continue because of the drop in yields and interest rate in the Nigerian financial market”, they said.

The drop in yields on fixed income instrument persisted last week with the Central Bank of Nigeria, CBN, further reducing treasury bills, TBs’ stop rates.

The N67.3 billion worth of 91-day, 182-day and 364-day TBs were auctioned at stop rates of 10 percent, 11.9 percent and 12.2 percent, down from 10 percent, 12.3 percent and 12.5 percent respectively in the previous auction.

Further analysis showed that between January and last week the apex bank had reduced stop rate for 91-Days bills by 100 basis points (bpts), 182-Days bill by 90 bpts and 364-Dasy bills by 250 bpts.

The fall in yields, which is expected to persist this month, will continue to undermine dollar inflows from FPIs and hence constrain accretion to the nation’s external reserves. Consequently, while accretion to the external reserves is expected to persist in June, it may not surpass the level recorded in May and hence limit the reserves from rising to or above $46 billion in June.

The naira last week depreciated in the parallel market and in the Investors and Exporters, I&E, window while turnover in the window dropped by 35 percent.

Data from FMDQ showed that turnover in the I&E window dropped to $550.46 million last week, from $850.68 million the previous week, indicating reduced level of activity in the window.

This triggered 35 kobo depreciation of the naira in the window, as the indicative exchange rate rose to N360.74 per dollar from N360.39 per dollar the previous week.

Similarly, the naira depreciated by 20 kobo in the parallel market as the exchange rate for the market rose to N359.7 per dollar last week from N359.5 per dollar the previous week.

On the other hand, the CBN, on Tuesday, sustained its weekly intervention of $210 million in the interbank foreign exchange market.

Disclosing this development, Director, Corporate Communications Department at the CBN, Mr. Isaac Okorafor said that “$100 million was offered in the wholesale segment, while the Small and Medium Enterprises, SMEs, segment received the sum of $55 million. The sum of $50 million was allocated to customers requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance, BTA, among others.”

He added that the apex bank’s effort had helped to guarantee stability in all the exchange rate windows. He further noted that the dogged implementation of the country’s foreign exchange restriction to some 43 items had boosted activities in the industrial sector. He also noted that the move had equally increased the level of confidence investors and the public had in the naira.

In their projection for the foreign exchange market this week, Analysts at Lagos based Afrinvest Plc, said: “Next week, we expect rates to continue to trade within a tight band across different segments of the market as the CBN sustains its weekly forex interventions.”

Analysts at Lagos based Cowry Assets on their part expressed optimism about the direction of the naira saying: “In the new week, we expect appreciation of the Naira against the USD across the market segments as CBN sustains its special interventions against the backdrop of rising external reserves.”

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