FCY Loans, Naira Repricing Require to Ease Current Account Deficit

FCY Loans, Naira Repricing Require to Ease Current Account Deficit
Bolaji Balogun, MD/CEO Chapel Hill Denham Limited

FCY Loans, Naira Repricing Require to Ease Current Account Deficit

Nigeria would need to take a loftier currency devaluation and/or foreign currency (FCY) borrowings in order to reduce current account deficit, Chapel Hill Denham said in its macroeconomic report.

The investment firm stated that the nation’s external position improved slightly in second quarter of 2020, with the current account (CA) deficit shrinking markedly by 42.6% to US$3.23 billion.

FCY Loans, Naira Repricing Require to Ease Current Account Deficit
Bolaji Balogun, MD/CEO Chapel Hill Denham

This translated to current account as percentage of GDP of 3.39% in the second quarter of 2020 as against 4.90% reported in the first quarter of the year.  

“While trade deficit grew more than two-fold sequentially to US$3.7 billion, Covid-19 induced decline in service (-67.6% quarter on quarter) and income (-66.9% quarter on quarter) net debit position weighed on current account”, analysts stated.

It was noted that this occurred amid a reported 36.4% quarter on quarter decline in the current transfer.

At this run-rate, analysts said the current deficit is looking set to close the year at US$17.7 billion compare with US$17.02 billion in 2019.

“This comes in line with our forecast of US$17 billion or 4% of the gross domestic product”.

“We believe that the CBN’s FX restrictions, as well as international travel restrictions helped deliver the smaller current account deficit”, Chapel Hill Denham said.

Notwithstanding this, experts at Chapel Hill Denham said authorities will require either raising substantial FCY borrowing or taking a loftier currency devaluation to significantly narrow the deficit.

“For us, we believe of a combination of both is very likely”, it remarked.

In the foreign exchange market, dollar paired against naira closed the week largely flat at N379.00, N380.69, and N385.83 at the official, secondary market intervention sales, and Investors/Exporters windows (IEW), respectively.

Analysts said they understand that CBN sustained its FX intervention across its different windows, to maintain its resolve towards keeping the exchange rate stable.

However, average daily turnover at the IEW dipped by 10.3% wow to US$92.81 million, also below pre-pandemic level valued at US$345 million daily average in the first quarter of 2020.

In the parallel market, the naira appreciated against the greenback by 1.8% week on week or N8 to N457.

Effectively, the premium between IEW and the parallel market rates narrowed to 18% from 21% previously.

In a related development, the Nigerian fixed income market sustained its bullish trading pattern from the previous week, as bargain hunting on elevated yield at the long end of the curve re-emerged.

That, together with the continued downward repricing of yields at the short end, drove a 60 basis points week on week decline in the benchmark bond yield curve to 5.91% from 6.51% previously.

Interbank funding pressures were broadly benign for the most part, partly due to Open Market Operation maturities worth N567 billion, but pressures resurfaced on Friday due to provisioning for the FX retail auction.

Nevertheless, front end rates continued to trade bullish, as the OMO and NTB benchmark curve compressed by 54bps and 52bps to 1.59% and 1.43%, respectively.

Last week, President Mohammed Buhari presented the 2021 budget termed the “Budget of Economic Recovery and Resilience”, which was largely in line with the Medium-Term National Development Plan (2021-2025).

The FGN proposed an ambitious N13.08 trillion expenditure, with expected retained revenue of N7.9 trillion, translating to a fiscal deficit of N5.2tn (3.64% of GDP).

To plug the shortfall, the FGN plans to raise new borrowing totaling N4.28 trillion, split across N2.14 trillion apiece for domestic and foreign borrowing.

Chapel Hill Denham said there is a strong possibility of a debt substitution exercise, given the limited legroom for non-conditional multilateral funding support.

Nonetheless, given the expected robust system liquidity, driven by the still elevated OMO maturity profile in Q1-2021, bond maturity expected in July 2021, series of bond coupon payments, and higher FAAC distribution, analysts believe the Nigerian fixed income market can absorb higher paper issuances in 2021, without necessarily instigating an upward yield repricing.

Analysts said barring a cash reserve ratio debit by the CBN, the financial system is expected to remain largely awash with liquidity, due to maturing OMO bill worth N370 billion on Thursday. 

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FCY Loans, Naira Repricing Require to Ease Current Account Deficit