Data from the CBN show that gross official reserves rose by USD5bn (13.7% m/m), to hit USD41.8bn last month, its highest point since October ’19. This is its sixth consecutive m/m increase and has been supported by the IMF’s SDR allocation worth USD3.3bn, the FGN’s USD4bn Eurobond issuance and rising oil prices. For a more accurate picture, we must adjust this gross figure for the pipeline of delayed external payments.
Total reserves at end-October covered 10 months’ merchandise imports on the basis of the balance of payments for the 12 months to March ’21, and 7.7 months when we add services. This is a healthy buffer.
The US Fed is set to taper its asset purchase program and revert to monetary policy normalisation. This move, which will eventually be mirrored by other advanced economies, will likely result in a redirection of international capital flows away from emerging markets.
The NBS’ most recent data on capital importation already show that in Q2 ’21, despite a weak base in Q2 ’20 when capital flow reversal from emerging and frontier countries was at its peak, the value of capital imported into Nigeria declined by -33% y/y and -54% q/q to USD875.6m.
In addition to the redirection of credit flows away from its borders, the most significant implication of advanced economies’ monetary policy normalisation for Nigeria will be a rise in its borrowing cost on the international capital market.
Oil prices remain high, supported by tight supply even as demand has rebounded stronger than anticipated. In its latest commodity markets outlook, the World Bank forecasts crude oil prices to average USD70/b this year, USD74/b in 2022 due to stronger oil demand, followed by a decline to USD65/b in 2023. To fully benefit from rising oil prices, Nigeria must ramp up its production. According to OPEC data obtained from secondary sources, Nigeria’s oil output (excluding condensates) was up 12% m/m to c.1.45mbpd in September.
We believe the rise in gross official reserves is very close to its peak and expect to see a decline in coming weeks as inflow into the reserves wind down and the utilisation of education, health and business travel allowances begin to reflect.
Gross official reserves (US$ bn)
Sources: CBN; FBNQuest Capital Research
