Week-on-week decline spikes by 49%

AT the backdrop of a sustained slide in the country’s fortunes, the nation’s external reserves is set to drop below $37 billion, the lowest level in 27 months.

Last week the downward trend in the reserves which commenced, July 5, 2019, worsened, as the week-on-week (w/w) decline shot up by 49 percent. Data from the Central Bank of Nigeria (CBN) showed that the external reserves dropped to $37.231billion on Thursday, February 13 from $37.725 billion a week earlier. This represents $494 million w/w decline and 49 percent deterioration when compared with the previous week’s $331 million decline.

Financial Vanguard analysis also showed that the $494 million w/w decline represents the highest in 14 weeks, since October 10, 2019, when the reverses suffered w/w decline of $446 million.

The continued decline in external reserves is majorly due to increased dollar sales by the CBN to defend the naira in the face of huge dollar demand by foreign portfolio investors exiting the nation’s fixed income market.

Financial Vanguard investigations revealed that the sharp decline in reserves last week might not be unconnected with the increased dollar injection by the apex bank into Investors and Exporters (I&E) window also last week to ensure the naira did not depreciation to N365 per dollar in the window.

On Tuesday the naira depreciated to N364.95 per dollar in the window, from N364.37 per dollar closing rate on Friday the previous week.

The intervention of the CBN, however, prompted a slight appreciation to N364.85 per dollar on Wednesday.

But the appreciation was almost completely reversed the next day, as the naira depreciated again by seven kobo to N364.92 per dollar on Thursday.

The trend was again reversed on Friday with the naira appreciating by 16 kobo to close the week at N364.76 per dollar in the I&E window.

However, compared to the previous closing rate of N364.37 per dollar, the naira depreciated by 39 kobo, representing the fourth consecutive weekly decline in the I&E window.

Analysts opined that the apex bank will continue to defend the naira, at least till the end of June this year, notwithstanding the sharp decline in external reserves.

“Despite the rate of decline in foreign exchange reserves, which has heightened fears regarding the possibility of a currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defence through to, at least, first half of 2020, H1-20”, said analysts at Cordros Capital.

Analysts at Cowry Assets Management Limited also stated: “In the new week, we expect stability of the Naira against the USD across the market segments as CBN sustains its intervention; although at a cost to Nigeria’s external buffers.”

The sustained intervention would consequently, pressure the reserves down below USD37 billion by end of this week.

Higher inflation in January

Meanwhile analysts have projected a higher inflation rate for January, indicating five consecutive months increase in the headline inflation rate. While analysts at Financial Derivatives Company projected 11.05 percent inflation for January, analysts at Cordros Capital projected 12.12 percent inflation for the same month.