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Nigeria’s new Eurobond to push external reserves to $40bn – FBNQuest

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Nigeria’s external reserves are estimated to grow to about $40 billion by the end of the year, following the latest Eurobond issuance of $1.25 billion in March 2022, according to a report by the FBNQuest, an investment banking and asset management business of FBN Holdings plc.

Africa’s largest economy’s gross official reserves declined by $317m (-0.8%) month/month to $39.5 billion in March 2022.

The drop was the fifth in a row as the reserves have been depleting by roughly $451m on average on a monthly basis since November 2021. The gross reserves are calculated on a 30-day moving average basis.

At its last meeting in March 2022, the Monetary Policy Committee (MPC) noted the decrease in the level of gross external reserves to $39.44 billion as of March 17, 2022, from $40.21 billion on January 25, 2022, indicating a decrease of 1.95 percent during the review period.

“Although an expected boost to the buffer is due from Nigeria’s $1.25 billion Eurobond issue in March 2022, we expect this to be properly reflected in the reserves in coming days,” analysts at FBNQuest said.

However, Nigeria’s external reserves have started growing since the beginning of this month. The foreign exchange reserves have increased by 0.45 percent to $39.713 billion as of April 12, 2022, compared to $39.537 billion on April 1, 2022, data from the Central Bank of Nigeria (CBN) indicated.

Total reserves at the end of March 2022 covered 9.4 months’ merchandise imports based on the balance of payments for the 12 months to September 2021, and 7.2 months when added services.

“We consider this a healthy buffer. For a more accurate picture, we must adjust this gross figure for the pipeline of delayed external payments,” the analyst said.

Although elevated crude oil prices, which are currently above $100/barrel, should augur well for the reserves, accretion has been hampered by Nigeria’s low crude oil output, which has been exacerbated by oil theft and pipeline vandalization.

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Another factor is the NNPC’s deduction of subsidy claims from source before making remittance to the federation account.

According to OPEC’s monthly oil report for March, Nigeria’s crude oil output (excluding condensates) averaged around 1.4 million barrels per day (mbpd) in January and February 2022, far below its OPEC production quota of about 1.73mbpd.

The oil cartel recently raised Nigeria’s production quota for May to 1.75mbpd. However, considering the difficulties with oil theft and evacuation, the quota is unlikely to be met.

Nigeria’s 2022 budget (ex-supplementary) envisages that a portion of the fiscal deficit will be funded by external borrowings of about $6.2 billion.

“As such, we still see accretion to the reserves from two potential sources namely: Eurobond issuance despite their higher costs due to the withdrawal of accommodative monetary policies by advanced economies and loans from multilateral sources. Having raised $1.25bn already via Eurobonds, the budget still leaves a gap of close to $5bn that can be raised from these sources.

“We estimate gross official reserves at roughly about $40bn by year-end, based on current monthly attrition and probable accretion from external loans,” the analysts said.