NSR Q4 2017 (6) Naira Resilience: New Normal or Fleeting Reality?

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Culled—Proshare

October 12, 2017/ ARM Research   

As seen in the previous sections, recent plunge in ‘reserve depletion’ (-90% QoQ to ~$290 million) improved Nigeria’s financial account and tapered concerns over narrowing CA surplus and naira resilience over much of Q2 17. Going by latest CBN numbers, the naira again showed toughness at both the NIFEX and BDC markets over July and August—with breakdowns suggesting a 4.1% appreciation in the latter relative to Q1 17 average.

At the NAFEX end, naira appreciation extended further into September (+0.9% MoM to mean of N359.79/$) with daily market turnover reaching $279 million by mid-month. Consequently, narrower spreads have reduced the potential for arbitrage transactions. For us, the new-found strength in the naira reflects sustained CBN dollar injections into various FX market strata and higher foreign portfolio inflows—with the former tracking improvements in Q3 17 reserves (+4.8% QoQ at $31.8 billion) that have left net monthly dollar inflow into the economy printing 21% higher at $3.5 billion relative to the average over 2016.

No doubt, optimism over the apex bank’s ongoing FX interventions was aided, to a great degree, by currency-induced collapse in imports which first became noteworthy in July 2016 (-36% MoM to $2.5 billion—lowest level since February 2009). Precisely, the low base for imports masked the impact of collapse in reserves over 2016 by flattering import cover over the last eight months (+54% to ~12 months). That said, foreign appetite for naira assets was equally boosted by the regulatory mandate directing banks to quote the floating IEW rate rather than a fixed exchange rate.

This was seen by markets as a move towards a unified, floating exchange rate. Irrespective, the jury is still out on if the current naira traction is sustainable. However, from a BoP perspective, our expectation of continued growth in the financial account—with reserve drawdown expected to contract further as FPIs and other investments remain elevated—suggest that the naira would still hold its own in the near term despite expected decline in CA surplus.

In any case, notwithstanding CBN’s huge FX injections into the economy5, its net dollar inflow has, thus far, remained positive (save for the one-off deficit of $936 million in May) even as surging autonomous dollar supply provides impetus to currency markets amidst recent premarket initiatives (i.e. gravitation towards synchronized exchange rate for the country).

Whilst we note that, farther out, currently rebounding imports could slightly dim the picture—especially from an import cover perspective, we retain our near-term bullishness on the USD across FX market strata and bet on it trending around current levels till the end of H1 18.

Proshare Nigeria Pvt. Ltd.

From ARM’s H2 2017 Nigeria Strategy Report 

  1. NSR Q4 2017 (5) – Balance of Payment to Survive Murky Waters
  2. NSR Q4 2017 (4) – Nigeria’s Net Creditor Status Diminishes Again
  3. NSR Q4 2017 (3) – Fiscal: Federal Revenue Growth Shows Signs of Life
  4. NSR Q4 2017 (2) – GDP: Uphill with the Handbrake On
  5. NSR Q4 2017 – Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?

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