• Friday, July 19, 2024
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Concerns over foreign reserves accretion on capital inflows


The nation’s robust foreign reserves currently put at over $48 billion, with portfolio capital inflows accounting for $12 billion or 17.7 percent has become a source of worry to analysts, BusinessDay has learnt.

Most analysts, who spoke to BusinessDay, argue that the robust reserves, which can finance about 13 months of imports, may constitute a major source of accretion that will make the economy vulnerable to external forces should investors withdraw their funds suddenly.

This is so because a chunk of the reserves is in foreign capital inflows often regarded as hot money.

Specifically, analysts say capital flow reversal may on the back of a likely downward review by the United States Federal Reserve of its monthly stimulus for purchase of mortgage backed securities from banks create liquidity that would make portfolio investors to reduce their offshore investments to cover the gap.

“External reserves remain robust at $48.41 billion, financing approximately 13 months of imports. Increased portfolio capital inflows remain a major source of reserves accretion. There is risk of capital flow reversal with $12 billion approximately hot money,” says Bismarck Rewane, chief executive, Financial Derivative Company Limited.

Analysts at Afrinvest said, “We foresee a marginal capital flow reversal in the short term, premised on speculations that the US Federal Reserve may review its monthly stimulus downwards, where it purchases Mortgage Backed Securities (MBS) from the banks to create liquidity.

“If this happens, the portfolio investors may have to reduce their investment positions offshore to cover for the gap that may arise. This implies that there would be demand pressure on the dollar as they repatriate their funds. In our view, we expect the CBN to defend the naira when it moves outside the N155/US$ (+/-3.0%) band, necessitating a decline in the foreign reserve.”

Razia Khan, analyst with Standard Chartered Bank, London, said, “With portfolio inflows there is always some risk of reversal, especially if domestic reform momentum should slip, or if the election-environment in Nigeria takes centre-stage with accompanying deterioration in key metrics.

“The key risks are around what happens in Nigeria itself. If reforms disappoint, or if oil prices should slump, Nigeria is at risk of seeing a reversal of those inflows, with resulting pressure on the FX rate and/or FX reserves.”

Samir Gadio, emerging markets analyst with Standard Bank, London, said, “The CBN has enough ammunition to address a temporary USD demand-supply mismatch, with FX reserves standing at USD48.4 billion on June 5, but those have actually flattened in recent months and most of the accumulation until early 2013 was on the back of capital inflows rather than fiscal savings.

“The current composition of offshore portfolio holdings is dominated by real money accounts (and less by hedge funds unlike in 2007-08), but this does not necessarily mean that real money investors will not be forced to partially pull out should they face significant redemptions.”

They argue that an increase in foreign reserves based on fiscal savings rather than capital inflows serves as a buffer for the currency and thereby making the exchange rate to be stable.