Alarm Bells As Current Account Surplus Narrows Again

Culled—Proshare

September 19, 2017/ARM Research

Higher Import and Service Deficit Surge Trim Surplus
The blue ink in Nigeria’s current account (CA) narrowed from a surplus of $2.7 billion in Q1 2017 to $1.4 billion in the second quarter – the second consecutive QoQ contraction in CA surplus since the turn of the year. This was largely reflective of decline in trade surplus and, more importantly, sharp jumps in services and income deficits in the period.

On the goods (trade) front, contraction in surplus position was underpinned by a surge in imports which slightly offset milder export growth. Specifically, with exports displaying a much tamer QoQ growth of 8.5%1, an over 13% QoQ FX liquidity-induced jump in imports easily shrank the country’s trade surplus to $2.1 billion in Q2 17 (vs. $2.3 billion in the first quarter of the year). An isolation of quarterly developments on the import front revealed that QoQ growth was powered by non-oil with food & beverage as well as industrial supplies now jointly constituting 47.4% of total imports (vs. 27.4% in Q1 17).

Away from our concerns on narrowing goods balance, recent developments on the services2 and income fronts also inspired less confidence. Precisely, cumulative deficits across both segments expanded 42% QoQ to $6.1 billion in Q2 17 to largely nullify milder growth in current transfers and leave the country’s CA surplus 48% lower relative to Q1 17 levels. In view of these, the ratio of CA surplus to GDP declined 28bps QoQ to 2.4% in Q2 17.

Reserve Improvement Boosts Financial Account
Elsewhere in the balance of payment data, CBN numbers indicated improvements in financial account—the segment which records the net financial flows into the country. Precisely, the country’s financial account expanded over three-fold QoQ to $4.3 billion largely reflecting slower decline in cash reserve (-90% QoQ to $299 million) and increases in other investments (such as trade credits and loans), FPI and FDI.

Importantly, improvements in reserves mainly reflected better performance of transactions in official reserves that took the form of foreign exchange. On other fronts, higher FPI was mainly skewed towards equity investing going by information provided in CBN’s capital importation report. To be clear, capital importation into Nigeria increased by 97.3% QoQ to $1.8 billion in Q2 17 with breakdowns showing the biggest jumps in flows to the equity market.

Rising Imports and Services Deficits to Trim Current Account Surplus

Overall, goods (trade) surplus was narrowed by strong quarterly surge in imports which more than offset tame growth in exports—with the late re-opening of the Forcados terminal doing little to sizably impact the latter. This made pressures from expanding service and income deficits more telling in the review period.

Going forward, we expect crude export to ride gains from the first full quarter of Forcados re-opening in the current year. For evidence, titbits from the market is already pointing to crude production of ~1.96mbpd in Q3 17 (+6.5% QoQ). However, with mean crude prices remaining relatively stable over the past three months (+1% QoQ to $51.28), we see scope for only 7.6% QoQ growth in exports to $11.6 billion in Q3 17E.

On imports, despite the huge dollar dole out thus far in 2017, CBN’s dollar cash inflow numbers (+5.8% MoM to $3.9 billion in July alone) present ample re-assurance that ongoing interventions can be sustained in the near term.

This, combined with sustained improvements in FX liquidity, FPI flows, and rising reserves (+1.8% QTD to $30.8 billion), leaves scope for continued USDNGN stability and availability in the coming months—with knock-on effect likely to further buoy imports (+11% QoQ to $9.7 billion in Q3 17) and leave Nigeria’s trade surplus 6% narrower QoQ at $1.97 billion. Overlaying the implied goods trade surplus with target services and income deficits of $3.6 billion and $3.2 billion (respectively 4.1% and 3.6% of forecast Q3 16 GDP) as well as net current transfers of $6.2 billion, we expect the country’s current account to print at $1.36 billion and 1.5% of GDP in Q3 17.

On the financial account, we expect a combination elevated interest rate environment, improving economic picture and a flexible exchange rate system to sustain the demand for naira assets over the coming months. Overall, despite expected moderation in current account surplus, the still positive balance of payment picture suggests little downside risk for the naira.

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