Foreign exchange scarcity is currently deepening in Nigeria in spite of the fact that oil prices have remained above $50 per barrel.
To cushion the situation, the Buhari administration is warming up to make a Eurobond market call. Insiders in the Presidency have already hinted about the decision to raise foreign currency loans.
As part of his administration borrowing plan, President Muhammadu Buhari has requested Legislative approval for new external borrowing of $6.18 billion.
Nigeria under President Buhari’s watch is seeking to raise $3 billion or more in Eurobonds as part of the new debt rising profile.
Due to reduced foreign exchange inflow, the country’s external reserve has tumbled below $35 billion as the Nigerian imports payments continue to outpace export receipts.
Financial watchers say the apex bank is adding to the pressure with its decision to continue supporting the local currency at its weekly foreign exchange market intervention. Analysts say the Central Bank of Nigeria’s (CBN) foreign exchange intervention constitutes a drain on external reserves.
Foreign investors have remained on the sideline as they are yet to find the Nigerian economy attractive as negative returns persist in the fixed income market. Amidst FX scarcity which has continued to impact all the facets of the Nigerian economic sectors, analysts had projected a possible Eurobond call in 2021.
The Buhari administration’s revenue has also dropped despite the plan to spend on infrastructure in 2021. CBN has been criticised for financing the government, which analysts said was in breach of its Act.
Nigeria has began the process to access yet another tranche of foreign currency loans from the international creditors, in accordance with the Federal Government borrowing plan. The Debt Management Office (DMO) had said the government is working on issuing Eurobonds and plans to pick advisers through an open bid process.
DMO’s Director-General, Patience Oniha, said the amount to be raised would be within the foreign borrowing plans for 2021, said the country budgeted to raise N2.34 trillion ($6.14 billion) from foreign sources.
However, noting the development in the United States and other countries, analysts said Nigeria’s Eurobond call may attract higher rates than the local market.
But, the fixed income market has also commenced yields repricing as investors demand positive returns amidst rising inflation. In the second quarter of 2021, yields have increased significantly.
At $34.5 billion, the nation’s external reserve is low compare with the size of Nigeria’s gross domestic products, covering about five months of imports bill while foreign investors remain aloof due to multi-tiered local currency pricing.
As some investment analysts have noted, the CBN capital control targeted at curtailing repatriation of foreign currencies abroad amidst heighten FX demand backlog keeps investors away.
At the investors’ and exporters’ window, foreign currencies supply has been limited, trending below pre-pandemic level, according to currencies traders.
Vetiva Capital said in a report that while price and exchange rate stability are being addressed at the recently concluded Monetary Policy Committee meeting, the CBN chief, Godwin Emefiele, said the bank did not intervene in the Investors’ window in 2020.
Analysts attributed this to a possible reason for the price discovery process seen at the Nigerian Autonomous Foreign Exchange (NAFEX) rate depreciated beyond N410 to a dollar.
Recall that disagreement between the International Monetary Fund and the Nigerian Government over multi-tiered exchange rates has stalked $1.5 billion loans, as the World Bank group cited overvalued currency.
It appears the Godwin Emefiele’s led Central Bank remains unwilling to buck, though series of unorthodox foreign exchange management approaches have been implemented, yet Naira continues to struggle to find true value.
It is being argued that the devaluation of the local currency will have negative impacts on Nigerians amidst the rising twin evil of unemployment and galloping inflation rate.
But then, key industries that rely heavily on FX for raw materials import are finding it difficult to get foreign currencies, thus reduce productivity capabilities. Exchange rate-disadvantaged Naira has impacted fast-moving consumer goods and other key industries’ production costs, leading to unending price increments.
Nigerian economy continues to record upward price adjustment despite a meager minimum wage of less than $70 per month. The foreign exchange scarcity stress was exacerbated by the pandemic, lowering government revenue amidst excess oil supply.
But the trend in the oil sector has reversed as Brent Crude price trades more than $20 per barrel above $40 assumption to prepare budget 2021.
“While possible accretion in reserves could emanate from vaccine-induced recovery in oil demand, the need to shore external reserves remain essential.
“Nonetheless, we expect continued supply-side measures to address inflationary concerns and support output growth in the near to medium term”, Vetiva posited.
Budget 2021 document revealed that government plans to finance N5.6 trillion deficit via the local and international market, thus analysts are hoping to see Nigeria making the Eurobond call-in line with the plan.
A new development in the United States 10-year Treasury instrument has seen rates between 7-10% which some analysts believe would drive rate across the Eurobond. Also, Nigerian political and economic risk appears to worsen with rising insecurities could mean foreign investors would demand a higher rate.
In a statement, Finance Minister told the media that the government has adopted the Nigerian Autonomous Foreign Exchange (NAFEX) rate for government transactions. This signaled a tacit devaluation as analysts hoped the CBN is moving towards a more flexible foreign exchange framework.
In a speech, Emefiele made a disclaimer, saying the apex bank operates a managed float regime and has no plan to embrace a free float.
But, in a report, Chapel Hill Denham said while the CBN claims to be operating a managed float regime, the exchange rate arrangement is increasingly tending towards a crawling/hard peg.
Analysts are of the view that given the lack of flexibility in the pricing of the currency, weak liquidity, and unmet pent-up demand.
“Liquidity conditions have worsened in the foreign exchange market since the start of the year, due to lower intervention sale by the CBN and weak foreign portfolio inflows”.
Chapel Hill Denham noted that FX intervention in the I&E Window in February 2021 was the lowest since the CBN resumed intervention sale in September 2020. Year-to-date, daily transaction volume in the I&E Window has halved to $63.4 million per day from $124.3 million per day in Q4-2020.
Notwithstanding, analysts added that FX reserves have continued to decline, falling by 2.3% year-to-date to $34.6 billion (4.8 months of goods and services import cover). To support external reserves accretion, the CBN has doubled down on alternative sources of FX, including remittance inflows.
Also, Chapel Hill Denham said it appears the FGN will be making a return to the Eurobond market this year to finance its deficit and improve FCY liquidity locally.
“We expect both factors, as well as better-than-expected oil prices, to help support FX liquidity. Nonetheless, we believe the balance of payment adjustment is incomplete, and further currency adjustment (7% – 15%) is inevitable”, it added.
The Debt Management Office (DMO) recently said Nigeria’s indebtedness has increased to N32.915 trillion at the end of 2020. The new borrowing plan which is currently implemented seeks to balance the ratio of local and foreign borrowings at 70:30.
Policymakers said this is to further strengthen the domestic debt market and optimize access to both Concessional and Commercial sources of funding. Nigerian government paid a total sum of N2.5 trillion to service total public debts in 2020 amidst pandemic-induced global disruption.
This sum was however split between local and foreign debt service payments at N1.556 trillion and N590 billion respectively, as the foreign portion is converted at the official rate. Total external debt service payment gulped $US1.556 billion; 54% of the sum was expended on commercial Eurobond interest payments.
Some 28% of this amount was allocated to service multilateral taken and 17% for bilateral loans. Meanwhile, the debt office said total public debt to the gross domestic product as of December 31, 2020, was 21.61%. It however considersed this to be within Nigeria’s new limit of 40%, resulting from a recent adjustment to the fiscal responsibility act.
The MPC decisions
In line with analysts’ expectation, the MPC maintained status quo on all policy rates at the end of the 2-day MPC meeting which ended today, 23rd March 2021. However, the decision was not achieved by consensus as three committee members voted to hike the benchmark Monetary Policy Rate (MPR) – two by 50bps and one by 100bps – and six voted to maintain the MPR at 11.5%.
Then, the asymmetric corridor around the MPR was retained at +100bps/-700bps while the Committee voted to retain the Cash Reserve Requirement (CRR) at 27.5%, and liquidity ratio at 30.0%.
Key considerations
Policymakers considered moderate recovery in output growth in Q4-2020, associated mainly with the positive impacts of monetary and fiscal measures implemented to reflate the economy. It noted the GDP growth swung positive in Q4-2020, albeit marginally at +0.1% year on year, from the COVID-19 induced recession between Q2-Q3:2020.
Nevertheless, the committee noted downside risks to growth as efforts to achieve herd immunity continued to face headwinds. There were apparent concerns about the unabated rising trend of domestic prices and re-emphasized the exigency for monetary and fiscal policy collaboration to finance productive ventures, improve aggregate supply and push down prices.
The MPC also noted that fiscal headroom remained constrained and fragile, following the twin shocks of the pandemic and oil price volatility and the continued build-up of public debt. Chapel Hill Denham said the second MPC meeting of the year held against the backdrop of rising inflationary pressures and widening external and fiscal imbalance.
In April reading, inflation rate printed at 18.12% after falling by five basis point from 18.17% in March, 2021.
“Headline inflation rate touched a 4-year high of 17.33% year on year in February, while trade deficit widened (to 6.2% of GDP) in Q4-2020, despite the series of FX rate devaluations and currency controls introduced to stem outflows”.
Investment analysts said macroeconomic stability challenges became apparent in 2020, but the CBN choose to adopt a pro-growth stance to support businesses and households against the COVID-19 induced economic recession, arguing that inflation is mainly a supply-side phenomenon.
“The benefits of the CBN’s pro-growth stance reflected favourably in the Q4-2020 GDP print, as the economy posted a suspiring early recovery from recession, although the slackness in the labour market persisted, as shown in rising unemployment rate”, it added.
Chapel Hill said with GDP growth back in the positive territory, the expectation of investors is that the CBN will, over the near term, redirect its policy goals from growth, towards its primary mandates of price and exchange rate stability.
The MPC opted to hold key rates in March, which analysts said was in line with their expectations.
The CBN might have kept policy rate constant at the MPC meeting, financing conditions have tightened considerably over the past four months”, analysts commented after the March 2021 meeting. They attributed this to the weaker level of liquidity in the money market, as well as a more hawkish balance sheet policy by the CBN.
The CBN has used its balance sheet to tighten bank and non-bank liquidity, specifically using the issuance of Special bills, Cash Reserve Requirements (CRR debit), and OMO auctions to mop up liquidity in the financial system and raise market interest rates.
Q1 Market Analysis
As a result, the one-year open market operation (OMO) and Nigerian Treasury Bill auction stop rates has risen to 10.10% and 7.00% from 6.75% and 0.15% in November 2020, respectively.
“We do not expect to see a reversal in this trend and retain our expectation of a 100bps rate hike in 2021. In our view, the lack of consensus in reaching the status quo outcome yesterday signals a pivotal shift in the thinking of the MPC, in preparation for a more hawkish policy era.
“We see a very strong possibility of a 50-100bps rate hike at the May/July MPC meeting, if the economy maintains a positive GDP growth momentum in Q1-2021”, Chapel Hill Denham stated.
The committee arrived at this decision following the consideration of various macroeconomic variables like; the high rate of Unemployment (33.3%), the upward inflationary pressure (17.33%), and the insipid economic growth (0.11%) as of the fourth quarter of 2020.
“The decision to hold the rate and other policy parameters is in line with our expectation, given that the committee appeared tilted at the previous meeting more towards growth stimulation, which the economy is in dire need of considering the week figures posted in Q4 2020”, analysts said.
Furthermore, at the previous meeting in January, the chairman had posited that inflation is more of a supply side factor, hence validating the committee’s reluctance to tighten.
The committee noted that pursuing a hawkish stance, could cause a spike in cost of capital and worsen the current unemployment concern in the economy. On the other hand, the committee was unwilling to pursue a dovish stance given negative real returns with the rising consumer price index.
CSL Stockbrokers said MPC will continue to play down on the current inflationary pressure, which remains largely supply-side driven since tightening will further increase cost of capital and slow down investments needed to boost recovery of an ailing economy.
“Also, we consider a dovish decision far-fetched in the short to medium term as this may be bad for the currency. We however do not completely rule out tightening in the short to medium as any hit to the exchange rate could spur a hawkish stance – signaling a desperate move to attract more greenback”, the firm stated.
