The nation’s external reserves are set to hit six months high of $45 billion before the end of this month as foreign portfolio investors, FPIs, sustained dollar injection in a bid to take advantage of the double digit interest rate on Nigeria’s fixed income instruments.
Last week the reserves maintained upward trend for the sixth consecutive week. Data from the Central Bank of Nigeria, CBN, showed that the reserves rose to $44.722 billion as at Thursday, April 11, from $44.683 billion on Thursday April 4, implying weekly increase of $39 million. Further analysis showed that the reserves have gained $294 million dollars from $44.428 million since the beginning of the month. With this upward trend expected to continue, the reserves will hit $45 billion before April 30.
This will translate to the highest level of external reserves for the country in six months, specifically since September 18 when the reserves stood at $45.002 billion.
After falling persistently for seven months, from peak of $47.989 billion on July 5, 2018, the reserves commenced steady ascent from $41.296 billion on February 28. Since then the reserves have gained $3.43 billion or 8.3 percent.
This sharp gain is driven by increase in crude oil price and huge dollar injection by foreign portfolio investors seeking to take advantage of double digit interest rates on Nigeria’s fixed income instruments, namely treasury bills and FGN bonds, to maximise returns on their investment.
According to FSDH Merchant Bank, “The rise in the external reserves was driven by the significant rise in Foreign Portfolio Investors, FPI, in March and increase in crude oil price. We believe the increase in FPI was as a result of foreign investors’ interest in the Nigerian fixed income market on account of attractive yield and relatively stable exchange rate.”
Financial Vanguard analysis showed that dollar injection by foreign portfolio investors, FPIs, spiked by 363 percent to $7.54 billion dollars in the first quarter of the year, Q1’19 from $1.63 billion in the previous quarter, Q4’18. The highest dollar injection of $4.47 billion by foreign portfolio investors was recorded in March, up by154 percent from $1.75 billion in February.
Meanwhile activities in the Investors and Exporters, I&E, foreign exchange window indicate that dollar injection from FPIs is still high though lower than the level recorded in March.
Data from FMDQ showed that $2.1 billion have been traded in the window in the first two weeks of April. This translates to weekly average of $1.05 billion so far in April, down from weekly average of $2.3 billion in March.
Naira gain persists in I&E
Meanwhile the naira last week continued its upward trend against the dollar in the I&E window, as it appreciated further by one kobo. The indicative exchange rate for the window dropped marginally to N360.32 per dollar last week from N360.33 per dollar the previous week. Analysis showed that the naira has gained 36 kobo since April 1 and remained at 67 kobo since February 28 in the I&E window.
The naira, however, last week depreciated for the third consecutive week in the parallel market. According to naijabdcs.com, the live exchange rate platform of Association of Bureaux De Change Operators of Nigeria, ABCON, the parallel market exchange rate rose further to N359 per dollar last week from N358.8 per dollar the previous week, translating to 30 kobo depreciation of the naira.
On its part the CBN last week sustained its weekly sales of $210 million to support the naira. The wholesale segment of the market was offered $100.0m, while the Small and Medium Enterprises (SMEs) segment received $55 million. Similarly, customers requiring foreign exchange for invisibles such as tuition fees, medical payments and Basic Travel Allowance (BTA), among others, were also allocated $55 million.
Analysts recommend measures to protect external reserves
Meanwhile analysts at Lagos based investment firm, Financial Derivatives Company (FDC) Limited have stressed the need for measures to protect the nation’s external reserves.
Speaking in the latest edition of the company’s bi-month update, they stated: “External reserves constitute an important metric to evaluate the credit worthiness of a country by international agencies and foreign investors. External reserves are increasing in recent times, thanks to the rally in crude oil prices and higher oil production in Nigeria. By implication, the frequency of CBN’s forex intervention is expected to increase with the resulting stability in the exchange rate.
In order to maintain the current tempo, various measures have been suggested, and they include convergence of the exchange rates, transparency in the remittance of crude oil earnings, less emphasis on Eurobond issuance and controlling the influx of hot money That said, political will is the crucial ingredient to ensuring that these measures achieve their deliverables.”