The steady reduction in Nigeria's external reserves

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and a warm welcome to ThinkBusiness Nigeria, your Monday – Friday dose of commentary, contexts, and insights on business and economic news that matter to you.

These are interesting times. The NNPC has gone to borrow US $3 billion in return for future oil revenues. That’s not-so-great news. But it is worse that it publicly says it is for the purpose of defending the Naira.

I will rather the NNPC prepare its books for the purpose of determining the market price of the company and selling chunks of its equity in the international market. That will fix two things. First, deal with the opaqueness and lets all see what has been happening there. Second, it will raise substantially more cash for the government.

An individual can pick up the US $3 billion that was just raised …. It’s a mere drop in the ocean.

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Markets

• The benchmark NGX All-Share Index (ASI) shed 303.70 (-0.47%) points to close at 64,625.28, representing a week gain of 0.71%, 4-week gain of 1.36%, and an overall year-to-date gain of 26.1%. NEM Insurance share price declined by 10%, followed by Sunu Assurances Nigeria (-8.51%), Guinea Insurance (-7.89%) and Cornerstone Insurance Company (-7.09%). It was a very bad day for insurance companies.

• Oil prices settled lower on Wednesday despite a large drawdown in US crude stocks as investors’ worries about China's embattled economy against expectations of tighter supply in the United States. Brent crude futures fell US $1.44, or 1.7%, to settle at US $83.46 a barrel while U.S. West Texas Intermediate crude (WTI) fell US $1.61, or 2%, to US $79.38.

• Naira remain fragile at both the I&E window and on the streets. At the I&E window, Naira appreciated by 1.59%, concluding at a rate of N759.86 against the US dollar. On the streets, the currency saw a slight devaluation of 0.64%, resulting in a valuation of N935 per dollar.

• U.S. natural gas futures fell by more than 2% to more than a one-week low on Wednesday on forecasts for cooler weather, down 5.4 cents, or 2%, at US MInis$2.59 per million British thermal units (mmBtu), its lowest level since Aug. 7.

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National Headlines

• Ministerial Portfolios announced – Finally, the President has announced the portfolios of his ministers. There is no surprise that Wale Edun becomes the coordinating minister for the economy and Minister of Finance. There is also no surprise that Bosun Tijani becomes the Minister for Communications, Innovation and Digital Economy. Now, there are some ministerial designations that break with “tradition”. Nyesom Wike becomes the first non-Northerner to be the Minister for FCT. We also now have a minister focused on Marine and Blue Economy, and two separate ministers focused on gas and petroleum, respectively. However, it appears the President has decided to keep the overall supervisory role for the combined petroleum resources ministry for himself, following in the tradition of his predecessor.

• NNPC’s US $3 billion loan from Afreximbank – The Nigerian National Petroleum Company Limited announced on Wednesday it has secured a US $3 billion emergency loan from Afreximbank. The loan will be used in supporting the ongoing fiscal and monetary policy reforms of the President. The Naira has been on free fall since the aggregation of all the Central Bank of Nigeria’s exchange rate windows into the I&E window, depreciating about 27%, after an earlier about 40% devaluation two weeks after President Bola Tinubu assumed power. As mentioned above, the Naira currently trades to the US $ at N935 on the streets. This unsettling trend was accompanied by a steady reduction in the country's external reserves, further contributing to the currency's weakened state. (See news Analysis below).

Global Headlines

• U.K. headline inflation of 6.8% for July 2023 – UK consumer price index rose by 6.4% in July 2023, down from 7.3% in June. On a monthly basis, the index fell by 0.3% in July 2023 compared to a rise of 0.6% in July 2022. It shows that inflation remains sticky in the UK and leaves the Bank of England with a big decision next month when it meets September 21. Rate is currently on a 15 year high of 5.25%, 14^th consecutive increase in the key rate at the last meeting earlier this month.

• The Dutch recession – The Dutch economy entered a recession as it shrank 0.3% Q2 2023, latest data released Wednesday shows. The euro zone's fifth largest economy shrank for the second consecutive quarter, after a 0.4% contraction in the first three months of the year. Economic growth in the Netherlands had been almost 5% per year in 2021 and 2022 in a quick recovery from a COVID-19 slump.

News Analysis

The aggregation of all exchange rate windows into the I&E window and the removal of the restrictions on the exchange rate has led to a depreciation of about 27% in two months. Before June 13, 2023, the I&E window had witnessed an average exchange rate of N465/$ in May 2023. Following the lifting of the restrictions, we now have fluctuations in the range of N740-795/$ at the I&E window. Worse, the arbitrage that was eliminated has reappeared, with the Naira exchange rate to the US dollar now N930-950/$ on the streets. In the same period, the external reserve declined to US$33.86 billion as of August 14, 2023, 9% or US $3.22 billion since the start of the year.

The driving forces behind the depreciation of the Naira and the resultant widening of the exchange rate premium are multifaceted. The key point though is that both demand and supply are not responding to price changes in the short term. The source of supply that is largely within the control of the government – crude oil supply – is in grave danger, with July production barely above 1 million barrels a day. Meanwhile, capital importation has exhibited a prolonged decline, with data from the National Bureau of Statistics (NBS) showing a 45% reduction, from US $2.19 billion in Q4 2021 to US$1.32 billion in Q1 2023.