The $3bn oil and gas deal sealed by the Nigerian National Petroleum Company Limited (NNPCL) with Afreximbank will give the Central Bank of Nigeria enough time to source more foreign exchange to defend the naira, JP Morgan Chase & Co has said.
Liquidity is struggling to improve after the CBN Governor, Folashodun Shonubi said the bank was operating a managed float and would intervene when necessary.
The institution shared its view in a document titled, ‘Nigeria: Reform pause rather than fatigue: CBN’s financial accounts open a can of worms,’ obtained.
JP Morgan said that since the new FX policy regime was introduced, the CBN has continued to “intervene in small amounts at a rate around N740 to N750, without clearing the backlog of unmet FX demand.”
Trade at the NFEX had hit N800 until the CBN intervention, which drove it down to between N740 and N750 per dollar.
The spread at the parallel market at a time was around N950 per dollar, after speculators and local FX traders lost confidence in the currency.
JP Morgan said the revelations about Nigeria’s true foreign exchange reserves position have also compounded Nigeria’s forex crisis.
“Given the highly profitable nature of the currency swap arrangements between the CBN and domestic commercial banks, we expect these to continue for some time, albeit in smaller sizes and arguably more punitive rates. Furthermore, authorities are in the initial stages of identifying assets for sale, which may provide some medium-term relief.”
The US-based institution believes that the reserves were far below what investors and the market had initially thought.
JP Morgan said, “The President’s policy advisory council has recommended the government sell down its stake in the most joint-venture oil and gas assets, a proposal that is estimated to bring in up to $17bn. In addition, the recently announced $3bn loan to NNPC could help partly improve FX liquidity conditions in the market.
“We expect NNPC to sell the dollars to CBN and remit the naira proceeds to the government as upfront payments for oil revenues and taxes. That being said, the large external financing needs of the private sector will sustain FX pressure.”
JP Morgan identified another problem that compounded the glitches in CBN’s FX policy as the structural balance of payments deficit (BOP) in Nigeria.
It said BOP deficit and low net reserves have severely hampered Nigeria’s ability to transition to a significantly more flexible exchange rate regime.
“The process of rebuilding reserve buffers is likely to be protracted as significant reforms are needed to attract foreign direct (and portfolio) investment on a multi-year basis,” it added.
As a short-time fix, JP Morgan suggested that the CBN will have to increase the frequency of auctions in it’s Open Market Operations.