The Central Bank of Nigeria (CBN) will have to increase the Open Market Operation (OMO) yield to sustain Foreign Portfolio Investment (FPIs) in the face of crash in the price of oil, Nigeria’s mono-product, according to analysts polled by BusinessDay.
Following the outbreak of coronavirus in China, the price of Brent crude fell to as low as $35 per barrel on Monday, from the peak of $68/barrel in January 2020. The current price is below Nigerian government’s $57/b budget benchmark for the 2020 fiscal year.
Oil revenue accounts for the largest chunk of the country’s forex inflow. Aggregate foreign exchange inflow into the economy amounted to $36.36 billion in the fourth quarter of 2019, according to the CBN’s economic report for that quarter.
“The immediate concern of the CBN would be how to sustain/keep the FPIs from capital flight as the current reserves level might not have enough buffer to withstand this. This might include increase in yield to reflect the current risk,” said Akintunde Olusegun, financial market analyst at Polaris Bank Limited.
Olusegun said the apex bank has consistently maintained it will not devalue the currency, even though current realities that are beyond the control of the CBN would further fuel speculation of devaluation.
“I don’t see the apex bank opting for that option in the immediate term. I expect them to throw in other measures (orthodox and unorthodox) aimed at defending the local currency. I see devaluation as a worst case for the CBN,” Olusegun said.
In the OMO bills market on Monday, the bearish sentiment was sustained as the average OMO yields increased by 165 basis points to 14.70 percent compared with the last close of 13.05 percent on Friday.
A report by FSDH Research shows that selling pressure was witnessed across short, medium, and long tenor maturities, with average yields widening by 52 basis points, 77bpd, and 237bps, respectively. Yields on 11 bills fell, with the 27-August-20 maturity bill recording the highest yield decline of 2bps, while yields on 28 bills advanced with the 8-Dec-20 maturity bill registering the highest yield increase of 416 basis points.
The impact of the declining oil price due to the COVID-19 outbreak is adding downward pressure on the external reserves. Nigeria’s gross official reserves have declined by $1.71 billion to $36.30 billion in February 2020 and down to $36.22 billion as at March 5, 2020. This was the 9th successive monthly decline.
The cumulative fall of $8.82 billion is mainly due to the exit of foreign portfolio investors, which requires the CBN to sell foreign exchange from its reserves.
Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said the current drop in the price of crude oil will lead to a drop in revenue for the country and a drop in the foreign exchange inflows. Under the current situation, he said monetary policy has limitation to stop the global decline in crude oil price.
“In order to prevent capital flight from Nigeria, I think what the CBN can do is to ensure attractive yields on short-term instruments to reduce flight to safety and encourage inflows of foreign capital. The implementation of the current Non-Deliverable Forward (NDF) is also good to manage exchange rate risk,” Akinwunmi said.
“Policy makers at all levels will also need regular communications and encouragement with market participants on the strategies to deal with the current risk posed to the economy and financial market by the current crash in the crude oil price,” he said.
The foreign exchange is at higher risk as some Nigerians are buying dollars in anticipation for a currency devaluation.
“These are tough times for Nigeria, once again caused by outside forces,” said Charles Robertson, global chief economist at Renaissance Capital.
Robertson said the authorities have a difficult choice between cutting spending on much-needed investment, or maintaining spending by allowing the naira to depreciate in the NAFEX market, and sooner or later the latter is likely. Investors will be worried about investing in Nigeria when the oil price is this low, he said.
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