Reserves rise by $2b, parallel market volatility persists

Federal allocations hit system as rates fall
The nation’s foreign exchange reserves rose by $2 billion in the last three months, to $31.3 billion as at September 2.

The uptick in external reserves, already attributed to the demand management measures of the Central Bank of Nigeria (CBN) by analysts, was probably supported by increased accruals.

Still, the assessed bearish sentiment in the crude oil market appears to be persistent, posing a headwind to external reserves accrual, acretion and ability of the apex bank to defend its exchange rate peg.

Although the international crude oil price for Nigeria’s blend is marginally above $50, the market sentiment is already pricing in this risk “as the local unit is currently trading at N222.30/$ at the nine-month onshore forward market, while parallel market spot rate has fluctuated between N215.00 and N240/$ in the past one month.”

The Naira remained stable at N199.1/$ at the interbank market last week, a level at which it had been pegged since February 2015, when the Central Bank of Nigeria (CBN) adopted an order-based approach and terminated bi-weekly Dutch Auction sales of foreign exchange to importers.

The CBN has since then, sustained its intervention at the clearing rate of N197/$ to moderate volatility swings, with restriction on importers of 41 items from accessing the official segments of the market.

Already, CBN’s ability to defend its currency peg may have been hinged on the medium term, as the economy recorded a second consecutive deficit in its current account in the first quarter of 2015.

Also, low prospects for foreign portfolio flow as foreign investors participation in the capital market has reduced significantly due to foreign exchange concerns have been heightened by several analysts.

On the other hand, some analysts have said that CBN will be relieved with the recent commencement of production at the Port-Harcourt and Kaduna refineries.

The development has been put forward as positive for foreign exchange, since imports of petroleum products account for sizeable chunk of foreign exchange utilization.

Meanwhile, money market rates trended lower last week on the back of the high level of liquidity in the banking system, buoyed by the federal allocations, which hit the system on Thursday.

Financial system liquidity had rose to N250.3 billion on Monday from N207.2 billion it recorded the previous weekend, hence the Nigeria Interbank Offered Rates (NIBOR), on average, moderated 1.2 per cent to 15.4 per cent on Monday.

However, both the Overnight (O/N) and secured Open Buy Back (OBB) rates rose slightly by 17bps and 42bps to 8.5 per cent and 9.3 per cent respectively, due to the Open Market Operations (OMO) auction floated by the CBN on Monday.

Rates rose to week highs on Wednesday as liquidity was moderately tightened due to the Naira provisions by banks made 48hours before the currency auction scheduled for Friday.

The OBB and O/N consequently rose to 10.2 per cent and 9.8 per cent at market close on Wednesday, as N172.9 billion of Treasury-bills, which matured on Thursday were rolled over through 91, 182 and 364-day tenured bills issued at marginal rates of 10 per cent, 13.5 per cent and 14.7 per cent respectively.

Additional N114.9 billion of OMO bills matured into the system on Thursday, hence, rates moderated from the week high, with the O/N and OBB closing at 7.5 per cent and 8.3 per cent on Thursday; but rose to 8.2 per cent and 8.8 per cent on Friday due to an OMO auction.

Wee-on-week, average NIBOR, O/N and OBB moderated to 15.0 per cent, 9.3 per cent and 8.6 per cent from 26.0 per cent, 48.4 per cent and 51.2 per cent.