Worries over $2b Forex Demand Backlog
Fitch Ratings has expressed concerns about the state of the naira and rising forex demand backlog estimated at $2 billion.
The forex demand backlog stood at $1 billion in May, according to investment banking firm FBN Quest in a note to investors.
The dollar demand has been swelling and piling up pressure on the naira.
It rose after the six-week economic lockdown was lifted with manufacturers and other importers seeking more greenback to import goods for the end of year sales. The lack of access to foreign exchange is hampering manufacturers’ ability to import vital raw materials, machines and spares that are not available locally. Importers with due obligations have been scrambling for hard currency while providers of foreign exchange such as offshore investors have exited.
The Central Bank of Nigeria (CBN) is expected to gradually clear the backlog as business activities begin to return to normal and the impact of the COVID-19 pandemic eases.
The CBN in August adjusted the official rate to N379 per dollar from N360. This has not reduced the pressure on the local currency which now trades at N453 per dollar in the parallel market, indicating that it could weaken further.
According to analysts, there remains severe risks to the external reserves and the currency, especially given weak prospects for the recovery of oil and non-oil sources of forex supply.
Fitch Ratings had earlier downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook in April due to COVID-19 pressures. However, Fitch revised its outlook to stable following reduced uncertainties, stable oil prices and the reopening of the economy.
The rating action was also largely influenced by CBN’s management of external liquidity pressures through partial exchange rate adjustment, capital controls, forex restrictions and the rise in external reserves following the disbursement of International Monetary Fund’s $3.4 billion Rapid Financing Instrument (RFI).
Analysts at Afrinvest West Africa, an investment and research form, told investors that the revision to the rating is surprising given that severe external and fiscal financing pressures persist. “While Fitch alluded to stable oil prices, the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices. The slow and uneven recovery in global oil demand is also expected to linger till the end of next year, implying that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geo-political tensions,” it said.
Beyond oil and gas exports which only accounts for 35.8 per cent of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce.
“External reserve at $36.2 billion, despite inflows from International Monetary Fund, is still down 15.5 per cent year-to-date. The adjustments to the official exchange rate from N307.0$1.0 to N380.0/$1.0 and the slight weakness in the Nigerian Autonomous Foreign Exchange (NAFEX) to N380.0/$1 from N360 /$1.0 are too weak to correct the shock from weak oil prices, falling remittances and reduced capital flows. The restrictions on forex demand and the existing forex demand backlog have brought about a significant premium of around N79 in the parallel market, which we now consider to be a more market-reflective segment,” it said.
Afrinvest Nigeria analysts said the implication of the measures CBN has adopted appear to be understated by Fitch, despite citing the impacts in the form of poor investor confidence, slow growth recovery and trade weakness. With foreign investors still holding around $10 billion of Open Market Operation (OMO) bills as at August 2020.
Aside forex backlog, former CBN Governor Muhammad Sanusi, said Nigeria has a lot of portfolio investors who would like to take their money.
Speaking at a webinar organised by AZA, a cross-border payments platforms and forex trading firm, he said: “You’ve got about I think $4 billion on the wait list. The reserves of the country are $36 billion, the Central Bank has about $28 billion of reserves, so it’s clearly not a question of the Central Bank not having enough money to pay this, but would you just pay off $4 billion in one go?
“If people want to take their money out at any price, they could take a huge devaluation and take a hit. But if they want to preserve the value of their currency, there is some virtue in waiting for an orderly unwinding of these backlogs because we must remember that when Covid hit and after the Russia-Saudi fiasco, oil prices went down to $10 a barrel. For Nigerian oil, cost of production is about $22 a barrel, so, basically, reserves disappeared and something will have to give,” he said.