Friday, June 04, 2021 / 12:25 / by CSL Research / Header Image Credit: ING Think
Over the past few months, the Naira has been relatively stable at the I&E window, supported by high crude oil prices, while the parallel market rate remains under pressure due to high demand. Based on FMDQ data, the total FPI inflow for May was US $ 124.3 million, which remains significantly below the pre-pandemic level of around US $ 1.5 billion per month. . In addition, REIT funds which historically contributed about $ 13.4 billion on average to the total foreign exchange reserve now represent about $ 5.1 billion. This weakened influx therefore explains the low liquidity of the I&E window, which averaged US $ 78.1 million in 2021 compared to the pre-covid level (first 3 months of 2020) of US $ 1.7 billion.
In addition, the high crude oil price at US $ 71.6 / bbl did not translate into an increase in external reserves, which are currently down 3.2% year-on-year. In our view, while we recognize that weaker REIT inflows may have contributed to this, we strongly believe that overseas repatriation has intensified in recent months. To validate this assertion, we observed that on the spot and futures markets, the CBN remains a net seller, with net flows being negative since the start of the year. Thus, the total CBN intervention since the start of the year has averaged around US $ 841.6 million per month. This must have reduced the foreign currency arrears considerably, although no official estimate of the arrears of the apex bank was provided.
In our view, as global risk aversion subsides, foreign investor interest in risky assets in emerging economies should improve. However, despite the strong carry trade that exists, foreign capital inflows are expected to remain modest, with the exception of clarity on the exchange rate policy and repatriation mechanism. Overall, we expect the CBN to likely devalue the Naira by around 5-7% by the end of the year to free up foreign currency liquidity and reduce external imbalances, which are expected to reach 10.80 billion. dollars (2.1% of GDP) for 2021.
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