December 8, 2021/Proshare
by FBNQuest Research
Today’s chart shows a decline of USD614m (-1.5% m/m) in Nigeria’s gross official reserves to USD41.2bn in November. This decline follows four months of consecutive increases, and it reflects a slowdown in reserve inflows following accretion from the IMF’s USD3.3bnn SDR allocation and the FGN’s USD4bn Eurobond issuance, as well as a rise in the utilisation of allowances for educational, health, and travel purposes. Recall that Nigeria’s gross reserves are calculated on a 30-day moving average basis, which explains why they have been steadily increasing in recent months. For a more accurate picture, we must adjust this gross figure for the pipeline of delayed external payments.
Total reserves at end-November covered 9.6 months’ merchandise imports based on the balance of payments for the 12 months to June ’21, and 7.2 months when we add services. We consider this a healthy buffer.
In two days of testimony last week, the Fed Chair, Jerome Powell indicated that in response to surging inflation, the committee could accelerate the pace of tapering monthly asset purchases.
A faster rate of tapering would suggest that monetary policy normalisation would occur sooner than expected. Other advanced economies are expected to normalise their monetary policy as well. One of the most significant implications of this is a shift in international capital flows away from emerging and frontier markets such as Nigeria, as well as a spike in borrowing costs on the international capital market. The US Fed meets next week.
At the France-Nigeria Security and Economic Summit last month in Paris, the CBN governor stated that foreign reserves will surpass the USD42bn threshold by mid-2022. His optimism was hinged upon sustained increase in crude oil price, the impact of Eurobond issuance, and a stable exchange rate. We note, however, that these expectations are largely dependent on exogenous factors, not least the oil price which has been volatile due to the impact of the pandemic.
Nigeria’s oil production capacity continues to limit the country’s ability to reap the benefits of elevated oil prices. According to OPEC data obtained from secondary sources, Nigeria’s oil output (excluding condensates) declined by 3.2% m/m to c.1.35mbpd in October ’21.
Barring any large outflows, we see reserves at +/- USD40bn by year-end.