Money market

Foreign reserves slide to $39.8bn- CBN

Foreign reserves slide to $39.8bn- CBN
Story by Kayode Tokede
The Central Bank of Nigeria (CBN) has revealed that the nation’s foreign reserves dropped to $39.8 billion as at November 29, 2019.
Nigerian NewsDirect can report that the nation’s foreign exchange buffer for the first time it dropped below $40 billion in almost two years despite stable in global oil prices that closes last week at $63.98 per barrel as at last Thursday, according to Organization of Petroleum Exporting Countries (OPEC).
At 39.8billion as at November, 2019, it means the foreign reserves in November depreciated by $641.8million or 1.59 per cent from $40.46 billion it opened for the month under review.
Also, the foreign reserves have depleted by another $1.1 billion in less than five weeks, as this is the highest fall it had recorded in the past 23 months, Nigerian NewsDirect can report.
While providing reasons for the latest decline in the country’s reserves, the CBN disclosed in its monthly economic report for October 2019 that the decline was due, mainly, to foreign exchange market interventions, direct payments and foreign exchange sales at the Investors & Exporters Foreign Exchange (I&E FX) and SMIS intervention window.
The nation’s foreign reserves may have continued to plummet in recent months, but the CBN has once again stood firmly behind its intervention policy.
The CBN governor, Godwin Emefiele while speaking at last week’s Monetary Policy Committee (MPC) in Abuja said the drop in the foreign reserves was not enough to create fear in the economy.
According to him, “During the period when we had an economic crisis in 2015, 2016 and early 2017 where reserves dropped to $23 billion, the country managed it and it survived. We do know that there is a focus on the fact that crude oil price is not as resilient as it was in 2018.We believe that crude oil price today at $63 per barrel, notwithstanding the drop in reserves below $40 should not cause any panic.”
While the CBN may have doused the tension with its remark, economic headwinds suggest investors should be worried.
For instance, while reading the communiqué on last week, the C governor disclosed that the Federal Government should reduce the $57 oil price benchmark as oil prices would remain relatively weak into the foreseeable future. This means foreign exchange earnings for Nigeria may continue at the low ebb going into 2020.
Investors are already raising concerns as the sustained decline in the country’s external reserves is raising questions about whether the CBN has the capacity to continue to ensure exchange rate stability.
Commenting recently, the Chief Executive Officer, Financial Derivative Company Limited, Mr Bismarck Rewane, said, “Demand for dollars will increase in the coming month due to inventory build-up ahead of Christmas and this will mount pressure on external reserve, hence gross external reserve level may decline further.”
Analysts at InvestmentOne Research noted that, “following the trade dispute between China and U.S., concerns about global growth and demand for oil has risen.
“This has put a downward pressure on oil prices with Brent crude price going as low as $56.23/bbl in August 2019, from $/74.57bbl in April 2019.
“Price of oil in 2019 has been, on the average, lower than price in 2018 and this may have led to the slow momentum in FX reserve accretion.
“Furthermore, as a result of risk off sentiments as analysts predict that a recession may be lurking, foreign portfolio investors inflow into the I& E FX window declined over the last month further limiting the accretion to reserves.
“In addition, FPI playing in the economy may have exited with their funds, as some investors seek to protect funds in safe havens, thereby putting downward pressure on foreign reserves.
“We also draw attention to the payment of coupons on Nigeria sovereign bonds which could have also put downward pressures on foreign reserves. Nonetheless, going forward, we believe this level of reserves is adequate for the CBN to defend the currency from global pressures in the near term.”
With a large chunk of the country’s reserves also used in servicing external debt, the foreign reserves may just continue to deplete, and this may pose a serious threat to the Nigerian economy going into 2020.
Already, more borrowings to fund the 2020 budget has been mooted by the government. This means as foreign portfolio investment declines, rise in debt servicing and continued intervention by the CBN in the FX market will trigger more pressure on the country’s reserves. The drop in foreign reserves means available buffer for the CBN to stabilise the exchange rate continue to weaken, suggesting devaluation may be on the cards if things get worse next year.

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