After adding $9.0bn in H1-18 to close at $47.9bn, Nigeria’s external reserves depleted by $3.5bn in Q3-18 despite upticks in oil prices (up4.1% in Q3-18) and the implementation of the Nigeria-China currency swap program. Clearly, pressure on the reserves gives an insight into the sentiment playing out in the currency market. Although relatively stable compared to peers across emerging and frontier markets, the naira shed 0.7% in Q3-18 at the Investors & Exporters window as the demand for the greenback strengthened.
In our view, pressure on the reserves is driven by two major factors: First is the sharp reversal of portfolio funds which constitute the bulk of capital importation into the Nigerian economy from mid2017 to mid-2018, due to rising Treasury yields in the US; and the second relates to increasing political tension in the Nigerian economy with a traditional effect of driving off capital inflow into the country.
Going forward, we expect the pressure on the local unit to be sustained as the build-up to 2019 election reaches the climax. Thus, the external buffer will further nosedive as the CBN pushes forward to defend the Naira. On the bright side, we do not see a devaluation in the near term, given that Nigeria’s current $43.6bn dollar reserves cover up to 12 months of import.