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  • External Reserves Down as Foreign Portfolio Investors Anticipate US Rate Hike

By Obinna Chima

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.

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.