Further naira depreciation projected as external reserves fall by $955m in 10 days

N494 billion inflow to moderate cost of funds Analysts project higher inflation rate for Sept THE depreciation of the naira in the parallel market and the Investors and Exporters (I&E) window last week is expected to persist this week, even as the nation’s external reserves maintained its downward trend falling by $955 million in the first ten days of October. Last week the naira depreciated by N1 in the parallel market where the exchange rate rose to N360 per dollar on Friday from N359 per dollar the previous week.

In the I&E window, the indicative exchange rate crossed the N364 per dollar mark for the first time this year, rising to N364.12 per dollar on Friday from N363.42 per dollar the previous week. On the other hand, data by the Central Bank of Nigeria (CBN) showed that the external reserves declined to $43.35 billion on Wednesday, October 10, from $44.305 at the end of September, translating to $955 million in the first day of the month.

The reserves have been declining steadily since July 5, when it peaked at $47.798 billion. Since then the reserves have declined by $4.448 billion or by 9.3 percent. The steady decline in reserves is driven by increased dollar sales by the CBN to meet increased demand prompted by foreign portfolio investors exiting the nation’s debt market. Last week, the CBN sustained its weekly injection of $210 million into the interbank foreign exchange market, allocating $100 million to the wholesale segment, $55 million to the SME window and $55 million for invisibles. Analysts at Lagos based Cowry Assets Management Limited, projected further naira depreciation of the naira in most segments of the foreign exchange market this week due to persistent demand for dollar by foreign portfolio investors. They said: “This week, we expect further depreciation in the exchange rate in most market segments, especially at the I&E FX window as foreign portfolio investors’ demand for the greenback persist.” N494 billion inflow to moderate cost of funds Meanwhile cost of funds is expected to further moderate downwards in the interbank money market this week in response N494.76 billion inflow from maturing treasury bills. Last week, cost of funds dropped marginally in response to inflow of N277.07 billion inflow from matured treasury bills (TBs) which mitigated the impact of N244.1 billion mopped out of the market by the CBN through secondary market (or Open Market Operation, OMO) TBs.

According to FMDQ, interest rate on Collateralised lending (Open Buy Back, OBB) dropped by 169 basis points (bpts) to 19.17 percent on Friday from 20.86 percent the previous week. Also, interest rate on Overnight lending dropped by 230 bpts to 19.75 percent last week from 22.05 percent the previous week. This trend, according to analysts will persist this week, due to inflow of N494.76 billion from maturing TBs, though the apex bank is expected to continue its liquidity mop up operations through OMO TBs and also auction N147.63 billion primary market TBs. Analysts at Lagos based Afrinvest Limited said: “Next week, we expect higher activity level in the money market due to anticipated maturities worth N494.7 billion expected to buoy system liquidity, which we believe the CBN will continue with its liquidity mop-up through PMA and OMO bills issuances.”“Cowry Assets analysts on their part stated: “This week, T-bills worth N494.76 billion will mature via the primary and secondary market which will more than offset T-bills worth N147.63 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N5.85 billion, 182-day bills worth N29.25 billion and 364-day bills worth N112.54 billion. Hence, we expect liquidity ease in the financial system to be sustained with resultant moderation in interbank rates. We also expect stop rates to increase amid rising secondary market yields.” Analysts project higher inflation rate for Sept Ahead of the release of the inflation data by the National Bureau of Statistics (NBS) this week, analysts have projected higher inflation rate for September, citing higher food prices during the month. While analysts at FSDH Merchant Bank projected 11.37 percent inflation for September, up from 11.23 percent recorded in August, analysts at Financial Derivatives Company Limited projected 11.53 percent for the month. Analysts at FSDH Merchant Bank said: “The prices of food items that FSDH Research monitored in September 2018 moved in varying directions, and led to an overall 1.10 percent increase in our Food and Non-Alcoholic Index. This Index increased year-on-year by 13.37 percent, up from 253.84 points recorded in September 2017. We also observed an increase in the prices of Transport and Housing, Water, Electricity, Gas & Other Fuels divisions between August and September 2018. We estimate that the increase in the Composite Consumer Price Index (CCPI) in September would produce an inflation rate of 11.37 percent”. On their part, Financial Derivatives analysts said: “Year-on-year headline inflation is expected to increase by 30bps to 11.53 percent in the month of September. This will be the second consecutive month of rising inflation after an 18-month consistent decline. The rise in the inflation numbers would be primarily driven by higher food inflation as the recent floods in the middle belt region has undermined agric output. “The month-on-month (MoM) sub-index is also expected to move in tandem with the headline inflation, increasing to 1.06 percent (13.48 percent annualized) from 1.05 percent (13.38 percent annualized) in August. The end of the third quarter is usually the peak of the harvest season. However, the herdsmen/pastoral crisis coupled with the recent floods in the food producing states muted the impact of the harvest.”