Macroeconomic Note: Weaker External Position Points to Further FX Adjustment

Nigeria’s current account (CA) position sustained its deficit run for the sixth consecutive quarter in Q4-19 (+157% q/q). We highlight that the absolute CA deficit of USD6.97 billion translates to 5.3% of GDP – representing the highest point in history. Analysing the breakdown, we note that the negative outturn was largely occasioned by trade deficit (USD1.5 billion) – the first trade deficit since Q3-16 –, following a 17.0% q/q expansion in imports, which ran ahead of exports (-11.0% q/q). The deterioration in the trade balance, together with higher services (+9.2% q/q) and income (+0.8% q/q) payments, were enough to offset the improvement in remittances (+16.9% q/q).

Looking ahead, we estimate the probability of further deterioration in CA to be significant, as the COVID-19 virus continues to pressure economic activities. Over 2020E, weaker oil prices, a persistent inability to sell Nigeria’s Bonny Light cargoes, together with COVID-19 induced decline in capital importation imply further depletion of the country’s FX reserves, and a possible further adjustment of the FX rate.

The Worse is Yet to Come for Capital Importation.

Against the backdrop of issues surrounding global growth and the unimpressive domestic macroeconomic landscape, capital importation into Nigeria moderated by 32.4% q/q to USD3.80 billion. Save for FDI which grew by 24.5% q/q, other components declined significantly. For one, FPI declined by 37.8% q/q, occasioned by deceleration across all contributing lines – equities (-8.3% q/q), Treasury bonds (-48.3 q/q), and money market in.

In 2020, beyond the weak growth outlook, the extent of the impact of COVID-19 on economic activities is central to framing our outlook for capital flows. Should COVID-19 remain for an extended period without a vaccine or major gains in containment, uncertainties in both the developed and emerging markets will remain elevated. Thus, investors' apprehension towards risk assets, will mean subdued portfolio inflows into Nigeria. Also, given the scale of things thus far, we expect FDI and other investments to slow markedly.

Based on our forecast average price of c.USD30.00/bbl., we now expect FX reserves to decline to USD24.26 billion by June 2020. This excludes any Eurobond issuances, which have now been suspended. Our new FX reserves forecast is (1) a downward revision from our previous estimate of c.USD35.00 billion and (2) below the level the CBN governor said the apex authority would consider an official devaluation. As such, we foresee a further currency devaluation by another c.15% to NGN416.26/USD.

Cordros Research