Naira Sinks over Unresolved FX Supply Pressures

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Naira Sinks over Unresolved FX Supply Pressures

The Nigerian local currency, the naira, is suffering from multiple FX market-related depression that has reduced its purchasing power significantly since the beginning of the new administration.

These pressures have remained unresolved by the monetary authority which is practically under the watch of President Bola Tinubu over previous infractions currently under investigation.

At the beginning of the week, the naira depreciated by 3.3% to N773.25 at the Investors and Exporters FX window, and the exchange rate worsened to N1,000 per greenback in the parallel market. For the naira, a weak forex supply has remained a downside to exchange rate rebounds across the markets. There has been a relatively weak FX inflow into Nigeria.

This was a result of low-interest yield on naira assets in the fixed income market. The apex bank spotted foreign investors and the authority resumed special OMO Bills sales. Yet, this has not worked sufficiently to attract foreign currencies,

The World Bank has supported Nigeria with $1.95 billion between June and September 2023, according to an ICIR report. The amount is split as $700 million for adolescent girls’ learning and empowerment.

Another $700 million loan was allocated to Nigeria to expand the AGILE projects to eleven states, thereby accommodating more out-of-school children. Also, there was a $750 million loan for power projects

The rush effects of economic reforms have made things worse for more than 133 million Nigerians who, probably, have not touched foreign currencies in their lifetime.

While Nigerians were struggling to heal from Muhammadu Buhari’s weak economic performance, the new president launched two major reforms that spooked household finances, and raised both costs and standard of living altogether.

The National Bureau of Statistics put the headline inflation rate at 25.80%, and some market critics have started raising eyebrows. The risk of discrediting Nigeria’s data is growing after the statistics office announced a 4.1% unemployment rate under its new methodology.

Also, foreign interest could raise the country’s risk higher, which may reflect on borrowing costs in the future following growing doubt about the Central Bank of Nigeria’s net foreign exchange balance.

JP Morgan has different estimates, while both CardinalStone Partners and Cordros Capital among other investment banking firms have pushed out different estimates.

MarketForces Africa noted that none of these numbers tally with the CBN’s FX reserves balance recorded in its audited report. Reacting to the development, Fitch Ratings said in its report that the apex bank made it difficult to allow independent estimates.

On Monday, Brent crude was down by 0.08% to $93.19 per barrel, while WTI crude dipped by 0.50% to trade below the $90 market at $89.58 per barrel.  

Meanwhile, WTI crude futures hovered near the $90 per barrel mark on Monday as the market balanced tightening global supplies with demand uncertainties. The surge in oil prices, up nearly 30% since June’s end, was fueled by OPEC+ leaders Saudi Arabia and Russia extending supply cuts through the year-end, raising concerns of larger deficits in the fourth quarter.

Naira Gains 1.2% as CBN Sells FX to Banks

LAST WEEK: The Nigerian naira rebounded moderately at the Investors’ and Exporters’ foreign exchange window, a move that was supported by the Central Bank of Nigeria’s (CBN) decision to sell US dollars and other foreign currency to commercial banks. However, the exchange rate worsened in the open market as several Bureau de Change sold US dollars at N1000 to invisible FX users amidst scarcity.

For the local currency to gain traction, Nigeria must increase foreign currency earnings, either by pushing non-oil export or selling more hydrocarbons in the global market, research analysts at LSintelligence Associates told MarketForces Africa.

“The problem is the supply side. The net balance in Nigeria’s foreign reserves cannot be easily determined due to large obligations – swaps, forwards and other derivatives claims.

“While borrowing would have been an option, it is a bad time to visit the Eurobond market and the recent $700 million World Bank loan could only add minimal support to FX management”, LSintelligence said.

In the foreign exchange market, the naira continues to face significant pressures against the US dollar in the open market. FX market analysts projected that the exchange rate at the parallel market would cross N1000 in September with CBN intervention.

In its market update, Cowry Asset Management Limited said this alarming trend is primarily driven by a combination of factors such as dwindling foreign reserves, increased demand for foreign currency, and economic challenges. 

At the investors’ and exporters’ FX window, the naira gained strength by 1.21% week-on-week, closing at N747.76/$1 as the CBN supplied forex to deposit money banks.

Meanwhile, at the parallel market, the naira depreciated by 4.50% week-on-week to a historic low of N998 as a result of limited FX inflows into the economy.

Analysts reported that Nigeria’s FX reserve closed flat at USD33.28 billion. At the Investors and Exporters FX window, total turnover at the window advanced by 52.3% to USD418.61 million on Thursday as trades were consummated within the N475.00 – N910.00 per US dollar.

In the Forwards market, the naira rates increased across the 1-month contract gaining 2.0% to N781.96, 3-month appreciated by 2.9% to N795.39, 6-month contracts gained 4.4% to N814.91 and 1-year contract jumped 5.8% to N867.80.

In the global market, Oil prices declined as markets reacted to the Federal Reserve’s indication that it might maintain higher interest rates for an extended period, despite refraining from a rate hike at its latest meeting.

Market data showed that West Texas Intermediate crude traded at around the $90 band per barrel and Brent crude at $93.50 per barrel on Friday. Meanwhile, the price of Nigerian Bonny Light crude oil closed positively at above $100 to $100.09 per barrel, up from the previous week’s $96 per barrel.

Cowry Research anticipates the naira to trade in a relatively positive band to show further appreciation at the various FX markets barring any distortions while the apex bank maintains its interventions to shore up the naira value. Naira Devaluation Deepens Economic Crisis in Nigeria
The post Naira Sinks over Unresolved FX Supply Pressures appeared first on MarketForces Africa.

September 2023
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