The steady growth in official reserves has come to a halt over the past month, leading to murmurs offshore that the CBN might change its unconventional fx policies. Reserves peaked at US$47.87bn on 10 May and have since declined by US$440m. The naira briefly gave up some ground at NAFEX and on the parallel market. Several offshore portfolio investors exited the market, some of whom we hear have since returned, and sabotage of oil pipelines may have been a factor. However, the CBN has played the role expected of it by meeting fx demand at its windows.
- More wobbles are to be expected, triggered by the normalization of US monetary policy, geopolitical scares emanating from the White House (or elsewhere) and, less likely, a downward spiral in the crude oil price.
- We see the spot price of Bonny Light averaging US$68/b this year and closing 2018 at US$71/b. If we have to revise our forecast, we suspect that it will be northwards. This acknowledges the possibility that Gulf members of OPEC and Russia will achieve a dilution of the accord on output restraint.
- There are different ways of measuring official reserves. If we take the international liquidity position, as favoured by the South African Reserve Bank (Good Morning Nigeria, 08 June 2018), we would add gold and SDR holdings to the CBN’s figure, and deduct swap transactions and Eurobond issuance. This would trim reserves to, say, US$37bn to US$39bn, which would still amount to a healthy fiscal buffer by almost all criteria.
Sources: CBN; FBNQuest Capital Research
- Other reasons to expect continuity in the CBN’s fx policies should be restated: supportive monetary policy; the CBN’s reservations about fully market-determined practices; the views held in and around the presidency; the fact that the preferential rate suits the FGN in certain respects; and the negligible domestic pressure for change.
