Gross dollar reserves resume decline as foreign inflows, crude slide

For the first time since June 2017, BusinessDay analysis reveals that gross official reserves have begun to decline month on month. The first decline was seen in July after reserves fell by 1.40 percent from US$47.8 billion to US$47.12 billion month on month.
As at the first day of August 2018, data released by the CBN showed that there was a further decline by 0.10 percent from US$47.12 billion to US$47.07 billion.
FBNQuest analysts say the reason for the decline was the repayment by the FGN of US$500 million to holders of a maturing Eurobond which is yet to be refinanced. Further investigation by BusinessDay reveals the possible resultant effect of decline in Brent crude oil price, exiting of foreign and domestic portfolio investors and reduced crude oil export. The Brent crude oil price has declined by 8 percent to $73.32pb after reaching a peak of $79.80pb as at May 2018.
Analysis reveals that during the same period crude oil price began to drop, foreign reserves also began to fall to end the month of July at US$47.12 billion. In the last 2 months, oil production in Nigeria has lagged the projected production of 2.3 million barrel per day, benchmark of the 2018 budget. May production stood at 1.82 million b/d while June production stood at 1.89 million b/d. Lower crude oil production means lower oil exportation levels and this translates to lower inflow into the foreign reserve accounts of the federal government.
FMDQ data revealed that I&E FX window (NAFEX) weekly transactions have dropped to the range of US$750 million and US$900 million in contrast to US$1 billion as at late June 2018.
BusinessDay analysis reveals that July 2018 had the lowest foreign inflow in I &E FX window. In search for greener pastures i.e. international markets with higher yields, Nigeria has experienced lower investment inflows and higher foreign investment outflows coupled with political risk as the 2019 general elections draw closer. Keeping foreign investors in the country may mean raising yields as this would make investment in Nigeria look attractive to foreign investors.
Ayodele Akinwunmi, head of research and strategy at FSDH merchant bank ltd explained that Nigeria recorded the lowest foreign inflow in July 2018 since August 2017 in the I&E window, therefore the drop in inflows have led to the decline in the nation’s gross reserve within the same period. In July 2018 total inflows amounted to US$1.6 billion.
So far the force majeure of Shell petroleum Development Company of Nigeria (SPDC) has led to decline in oil output which could impact negatively on the gross reserves of the country.
Dolapo Ashiru, a Lagos based investment analyst told BusinessDay via phone that the short fall in oil production could be responsible for the decline in the gross reserve of the country. According to him, “it is nothing to be alarmed about as our main source of external revenue is crude oil production and as long as crude oil prices remain high above our budget benchmark and production remains high, there is no problem.”

DAVID IBIDAPO & SOBECHUKWU EZE