Naira Skids at Official, Parallel Markets as Oil Receipts Underperform
The Nigerian local currency, naira, traded weak at the official window as oil revenue underperformed expectation, causing fiscal slippage amidst large spending plan.
Consequent to low receipt from Nigeria’s record crude production -the core economic pillar that is facing multiple pressures due to weak investments – the accretion into the external reserve remain unimpressive.
Nigeria’s gross foreign reserve recorded its first weekly accretion in the past two months, as it increased by $13.19 million in a week to $40.51 billion. Despite a stronger buffer, the naira depreciated by 0.1% and 0.3% to N416.50 and N572.00 at the Investors and Exporters FX Window (IEW) and parallel market, respectively, according to Cordros Capital note.
Recalled that the exchange rate in the parallel market had appreciated to N560-565 in December 2021 at the time when the official window was weakened due to lower demand.
In the forwards market, the naira rate also depreciated at the 1-month contract by 0.1% to N417.04 per dollar and 3-month contract, the exchange rate depreciated 0.1% to N422.92. Again, naira fall at the 1-year contract by 1.0% to N447.12 per the United States dollar but appreciated 0.1% at the 6-month to N432.10.
“In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR.
“However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low”, Cordros Capital analysts said in their note.
Foreign Portfolios Investment (FPIs) which have historically supported supply levels in the IEW, accounted for as much as 53.8% of FX inflows to the IEW in 2019 will be needed to sustain FX liquidity levels, analysts said.
Cordros Capital analysts said they think further adjustments in the exchange rate peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.
Recall that International Monetary Fund, IMF, in a mission to Nigeria in 2021 advised Central Bank to adopt a unified rate and market clearing rate for transactions.
Early in 2022, the multilateral re-affirmed its position, saying adoption of market-clearing rate following a fresh devaluation of the local currency would attract foreign currencies inflow into the country.
But, CBN weakened naira in December 2021 at the investors and exporters window to N435 per the United States dollar. However, the market condition has reversed the exchange rate back to N416.50 as of Friday.
The core issue facing the Nigerian naira has been high imports bills that continually overrun FX inflows, which keep foreign trade results negative. National Bureau of Statistics, NBS, in a recent report shows that capital importation dropped in the third quarter of 2021.
In its note, Cordros Capital analysts maintain that the oil sector continues to weaken as the industry faced oil production challenges. Nigerian National Petroleum Corporation (NNPC), Nigeria’s crude oil output losses averaged 167.07kb/d in 10 months operation in 2021, according to a report.
The oil production losses witnessed during the period were due to the impact of infrastructure decay and complexities of operating the oil wells, both of which led to terminal shut-ins in some of the country’s major production facilities – Qua Iboe, Forcados, and Escravos.
Accordingly, crude oil production excluding condensates in a 10months period in 2021 printed at 1.39 million barrels per day was significantly below the 1.61 million barrels per day recorded in 10 months in 2020, analysts noted.
“If we exclude the impact of terminal shut-ins, our analysis shows that crude oil production (excluding condensates) would have averaged 1.56 million barrels per day during the review period.
Also, if we include condensates, crude oil production would have averaged 1.80 million barrels per day from 9M-2021 actual average of 1.63 million barrels per day”, Cordros Capital analysts stated in their note.
On that note, the investment firm does not expect a material change to the current development over the short term, given the nature of challenges which mostly involve a dearth of infrastructure investment.
Analysts said they expect the government’s oil revenue to be constrained over the short term. #Naira Skids at Official, Parallel Markets as Oil Receipts Underperform
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