External Reserves Down to $47.42bn as Foreign Portfolio Investors Anticipate US Rate Hike

  • Sovereign wealth assets up by 27 per cent to N534bn
  • NSIA to unveil new funding plans for 2nd Niger Bridge, others

By Obinna Chima in Lagos and Ndubuisi Francis in Abuja

Nigeria’s external reserves has maintained a sustained decline, albeit marginally in the past three weeks as foreign portfolio investors (FPI) continue to weigh the possibility that the United States Federal Reserve will raise interest rate at its meeting which holds this week.

A hike in US interest rate would mean an increased return for FPIs who may also be concerned about political risk in Nigeria.

Nigeria’s external reserves which hit a five-year high in the first quarter of 2018, fell by a total of $329 million, to $47.425 billion as of June 7, compared with the $47.754 billion it attained on May 21.

However, the movement of the reserves which are derived majorly from the proceeds of crude oil earnings, showed a continuous decline.

But it is not all gloom as the total assets of the Nigerian Sovereign Wealth Fund (NSIA) grew by 27 per cent to stand at N533.88 billion in 2017 compared to the N420.93 billion in the corresponding period of 2016, to the Managing Director/Chief Executive Officer of the Nigerian Sovereign Investment Authority (NSIA), operators of the Fund, Dr. Uche Orji, who spoke at the weekend.

The fund’s manager also said new funding plans for the 2nd Niger Bridge, Lagos-Ibadan Expressway and the East-West Road that have expressed funding difficulties for some time now, would soon be unveiled by the Authority.

Meanwhile, Fed had raised rate in March 2018 and thereafter signalled that it would further hike rate about two more times this year.

But a top central bank official who pleaded to remain anonymous explained that the move by the US Fed was not only affecting capital flows to Nigeria, but to other emerging and frontier economies as well.

“You will notice that in May, the Federal Open Market Committee (FOMC), which is the monetary policymaking body of the Federal Reserve held their position. But when they raise rate in March, between April and May, South Africa and Argentina lost heavily as investors left those countries.

“The foreign investors were contemplating to pull funds out of Nigeria, but they spared Nigeria.

“Even though it was earning seasons and they repatriated some of their dividends. But while they were taking funds out from Nigeria, they hit South Africa and Argentina badly.

“Last month when FOMC held rate steady, they (FPIs) went to Turkey and Indonesia, to the extent that even though Turkey’s policy rate went up, they still moved out of the country after some time.

“Now, this month, we have seen heavy moves into Indonesia. But if FOMC raises rate again at their meeting this month, there is the contemplation that they would go heavily into Malaysia.

“But while there is this massive movement of flows from emerging markets into the US, what is moving out of Nigeria is moderate because of the good oil price and the fact that treasury bills rates are still attractive.

“So, I would say the CBN has done well. The flows out of Nigeria has been repatriation of dividends and very minor outflows to balance their portfolio. “However, we are not going to pretend that political risks are not there,” the source explained.

In a related development, analysts at Lagos-based CSL Stockbrokers have pointed out that the decline in the reserves coincided with the weeks during which Shell took offline two major oil export pipelines – the Trans Forcados and the Nembe Creek Trunk Line.

“The pipelines in question are particularly sensitive to the government as well as stakeholders at large. Multiple attacks by militants on Trans Forcados in 2016 for example, brought Nigeria’s oil production to its lowest in years.

“The pipeline is indeed a major evacuation route for onshore oil production but it is a sitting duck for militants due to its design (onshore that is not buried under the ground). The pipeline also links a number of oil fields and oil mining leases (OML) in the western Niger Delta with the Forcados terminal on the coast.

“With this in mind, we believe a continued delay in pipeline repairs will be a major drag on foreign reserves growth over the coming months,” the firm stated in a report.

Meanwhile, the CBN Monthly Business Expectations Survey Report for May released at the weekend revealed that at 28.9 index points, respondents’ overall confidence index (CI) on the macro economy last month remained the same as the level recorded in April 2018. The businesses outlook for June 2018 showed a greater confidence on the macro economy at 65.5 index points.

The report noted that optimism on macroeconomy in May was driven by the opinion of respondents from services (17.6 points), industrial (9.2 points) construction (1.2 points) and wholesale/retail trade sectors (0.9), while the drivers of the optimism for June were services (39.5 points), industrial (19.5 points), wholesale/retail trade (3.3 points) and construction (3.2 points) sectors.

“Respondents’ outlook on the volume of total order and business activity in May 2018 was less optimistic, as the index stood at 15.1 and 16.1 points, respectively when compared to 17.2 and 18.5 points, respectively recorded in the previous month.

“However, respondents’ outlook on financial conditions (working capital) and average capacity utilisation improved, as the indices stood at 14.1 and 22.7 index points, respectively when compared with the 8.5 and 20.0 points, respectively recorded in April 2018.

“The improvement in the average capacity utilisation (CUI) index can be attributed to the positive outlook on financial conditions. Respondents were more optimistic on access to credit in the review month, with an index of 2.8 points,” the report stated.

Sovereign Wealth Assets Grow by 27% to N534bn

Meanwhile, the Nigerian Sovereign Investment Authority (NSIA), operators of the Sovereign Wealth Fund (SWF), is set to deploy more investments into infrastructure, expressing a move towards unveiling appropriate funding plans and project structures being redeveloped for the Lagos-Ibadan Expressway, Second Niger Bridge, Abuja-Kano Expressway and East-West road projects.

The NSIA, which is playing a deeper investment role in infrastructure projects under its Infrastructure Fund window, said while the Lagos-Ibadan Expressway, Second Niger Bridge, Abuja-Kano Expressway and East-West road projects fall within investible transactions for the Authority, its involvement was principally to ensure an increased inland road stock while creating cross-country arterial roads to catalyse the flow of economic activities.

NSIA Managing Director/Chief Executive Officer, Mr. Uche Orji, who briefed journalists in Abuja, weekend where he formally unveiled the audited financial results for the 2017 financial year, said “appropriate funding plans and project structures are being redeveloped for these projects and will be unveiled in 2018.”

Although the Authority had in February 2017 announced its plan to invest $760 million in the Second Niger Bridge last year, for instance, Orji’s disclosure that “appropriate funding plans and project structures are being redeveloped,” and it is expected to provide the compass into the level of NSIA investment in that project and the others.

Providing some insight into what kind of infrastructure the NSIA would be investing in, Orji listed some of them as toll roads, power, and healthcare, among others.

According to him, the healthcare sector was accorded a heightened degree of attention in 2017 as a key infrastructure focus area, adding that final contracts were drawn up with the approved partners of federal tertiary medical facilities under a medical public private partnership (PPP) programme.

“Within Q1 2018, NSIA closed the development of a privately managed advanced cancer radiotherapy treatment centre to be located within Lagos University Teaching Hospital (LUTH), and privately-operated medical diagnostic centres equipped with modern facilities to be located at the Aminu Kano Teaching Hospital; and the Federal Medical Centre Umuahia (FMCU) respectively.

“It is expected that by year-end, the Lagos centre would have reached an advanced stage of completion,” Orji said.

He also disclosed the creation of financial institutions that enable investments in infrastructure, citing that Infrastructure Credit Guarantee Limited (InfraCredit), a company established to provide credit enhancement against local currency bonds for eligible domestic infrastructure transactions.

“Within the period under review, InfraCredit completed its first transaction, a 10-year bond deal for Viathan Power, which significantly reduced Viathan’s interest expense by enabling it to access N10 billion of long-term funding via a direct bond raise with institutional investors,” he said.

Unveiling NSIA’s 2017 financial results, Orji said total comprehensive income (including the impact of foreign exchange gains) of N27.93 billion in the previous year stood at N149.83 billion, just as total comprehensive income (excluding the impact of foreign exchange gains) of N26. 28 billion (previous year) was N46.24 billion.

Total assets, he noted, recorded a growth of 27 per cent to stand at N533.88 billion compared to the N420.93 billion in the corresponding period of 2016.

He attributed 68 per cent of asset growth to the $250 million National Economic Council (NEC) contribution during its Governing Council meeting, but] which was received in the third quarter of 2017.

Return on capital employed (ROCE) on the core funds also showed 5.17 per cent, 6.05 per cent and 3.50 per cent for the Stabilisation Fund, Future Generation Fund and Nigeria Infrastructure Fund respectively.

On the outlook for 2018, Orji stated that global market volatility in 2018 was expected to be driven by rising interest rates in the United States, adding that on the local scene, anticipation of a further decline in interest rate in the Nigerian market would potentially discourage investors.

He, however, noted that in spite of this, the Authority would continue to maintain its diversified asset strategy to drive returns and mitigate market volatility, adding that it anticipates increased investments in infrastructure as more projects come up to financial close.