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Again, external reserves falls by $500 million in one week

CBN data reveals the nation’s external reserves fell by $500 million in the past one week.

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Central Bank of Nigeria, Foreign exchange market, Naira vs dollas, IMF, Foreign Reserves, External reserves, CBN, Why do we all love the dollar? 

Nigeria’s foreign exchange reserves have continued its free fall by suffering another major drop within the last one week, as the Central Bank of Nigeria (CBN) data reveals the nation’s external reserves have fallen again by $500 million in the past one week.

The nation’s foreign exchange reserves have been fallen continuously in the past three months. It will be recalled that, Nairametrics, less than two weeks ago, published an article where it drew readers’ attention to the fact that Nigeria’s reserve buffers have been depleted by $1.1 billion in just two weeks.

Recent Drop in Buffers

Though the external reserves currently stand at $42.34 billion as at Friday, October 25, however, CBN data shows it stood at $42.84 billion on the 17th of October, 2018. As at the 28th of September, the foreign reserves balance was $44.31 billion, before falling to $43.97 on October 3 and $43.26 billion on October 12.

Nigeria’s foreign reserves rose to a year high ($47.8 billion) on the 25th of June, 2018, but have since failed to hit the $48 billion mark. It has instead dropped by $4.86 billion in the last five months.

IMF Warned Nigeria

Less than three weeks ago, the International Monetary Fund (IMF) cautioned Nigeria against using its foreign reserves, warning that crude oil price could fall again at any time.

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In its latest Regional Economic Outlook, the Breton Wood institution emphasised that tighter global financial conditions resulting from normalisation of unimagined monetary policy in advanced economies or unexpected change in investor’s sentiments could limit financing and growth for several African nations.

Why is the External Reserves falling continuously?

About two weeks ago, the CBN Governor, Godwin Emefiele, explained that the fall in external reserves is not peculiar to Nigeria alone, as the reserves of other emerging frontier markets have been dropping because of rising interest rates in the developed economies.

Emefiele added that foreign investors, particularly those with portfolio investments that earlier invested in the Nigerian capital market are returning their funds to their home nations. He said the exit of the investors has created a huge gap in the Nigerian economy and those of other developing economies.

According to him:

“At this time where we are beginning to see reversal in development policy, where interest rates are rising, naturally, those flows are beginning to return back to where they came from.

“Practically, all emerging and frontier markets have suffered not just depreciation, but also, they have lost reserves.”

Reserve Buffers vs Naira Stability

Unfortunately for the CBN, amidst this current economic situation, it only has a choice to make between building foreign reserves or maintain the current position of the currency. The apex bank said a few days ago that it prefers maintaining a stable exchange rate than building external reserves, adding that Nigeria can only build reserve buffers if the nation wants to hold on to her reserves and allow the value of Naira to depreciate.

Therefore, it seems the CBN has made a choice of keeping the Naira stable than keeping the foreign reserves. This decision is not a bad one after all, as it will enable businesses to make proper plans. It will also avoid problems in the banking system assets because of the wide ramifications it may cause.

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Why External Reserves Still Matters?

Nairametrics is of the opinion that the foreign reserves still matters in several ways:

  • The nation is in the electoral season and the polity is becoming hotter by the day, as the 2019 election approaches. Going by revelations from the last general elections in 2015, that the then administration allegedly withdrew several billions of dollars from the national treasury; this drop may, therefore, create suspicion.
  • One of the reasons the CBN has been able to maintain Naira stability, in recent months, is by drawing from the reserves to defend the currency.
  • The foreign exchange rate remains the single most important metric for measuring how well the economy is fairing.
  • The CBN sold dollars in the interbank market a few months ago, as liquidity squeeze threatened rates at the Investor and Exporter window.
  • The Nigerian Stock market has also recorded a string of losses in the second and third quarter of 2018 with low foreign investor participation seen as one of the reasons why.
  • Nigeria’s vile political climate is also a possible risk that could be a deterrent to future foreign investor inflow in the market.

What Next

  • We always advocate that you hold a mixture of dollar-denominated and Naira denominated assets.
  • Follow the performance of the stock market as a bellwether for investor sentiments about the market.
  • At the moment, there are no major immediate concerns that the Naira will depreciate.
  • The one elephant in the room continues to be the militants. So long as they remain quiet, we can rest assured that the economy will stay resilient

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Julius Berger’s rebound contingent on full economic bounce back

Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions.

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Expatriates

Due to the COVID-19 pandemic as well as the economic impact of the measures put in place to slow the spread of it, many industries have experienced slower growth. The construction industry was not left out. According to reports by GlobalData, the construction output growth forecast for Sub-Saharan Africa (SSA) has been revised to 2.3%, down from the previous projection of 3.3% (as of mid-April) and 6.0% in the pre-COVID-19 case (Q4 2019 update).

The reason for the contraction was noted by GlobalData to be as a result of the global slowdown and the outbreak of COVID-19 in the region. Other factors responsible include economic headwinds such as inflation, spending cuts, widening fiscal slippages, suspension of certain projects and more that could disrupt the construction sector. This contraction is projected to be 4.3% in South and Southeast Asia while France is expected to shrink by 9.4% in 2020.

Leading Construction Company, Julius Berger, had foreseen the contraction in the industry and commenced efforts to mitigate its impact and cushion the blow. One of such efforts was the reduction in dividend pay-out. After initially announcing a dividend pay-out of N2.75K per 50K share for the financial year ended December 31, 2019 and a bonus of 1 (one) new share for every existing 5 (five) shares held, the company eventually recommended a final cash dividend pay-out of N2.00K per 50k share.

READ ALSO: Lafarge Africa is cutting it all out

It noted that the Group had “carefully considered the emerging social, operational, financial and economic impact of the COVID 19 pandemic, the outlook for Nigeria for the financial year 2020, and the impact on the business and cash flows of the Group.”

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The company’s fears have been confirmed by its recent financials which, among other negatives, showed huge foreign exchange losses of N3.102 billion in the first half of 2020.

Q2 was the hardest

Julius Berger’s construction portfolio includes infrastructure, industry, building, and facility services solutions. With companies and nations alike revising scheduled capital expenses as a result of the shrinkages in product demand (owing to global quarantine measures), uncertainties around supply logistics as well as supply of materials, the company had gotten hit. Q1 had its own issues, but Q2 birthed a new dimension of challenges for the company.

Revenue was down 33% from N68.9 billion in Q2 2019 to N46.1 billion in 2020. There was also a huge loss in profit after tax of around 200% from a profit of N2.3 billion in Q2 2019 to a loss of N2.3 billion and this can be attributed to lower revenue, and increased losses from the company’s many investments.

Exchange difference on translation of foreign operations for the quarter alone increased by 227% to N1.4 billion in Q2 2020 from N438.5 million in the comparative quarter.

READ ALSO: Petrol importation drops by 512 million litres in 3 months

Outlook for the company and for investors

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The disruptions the construction industry is currently experiencing is expected to continue for the medium-long term. Reports by Beroe Inc., a procurement intelligence firm, reveal major concerns that companies in the industry will witness profits being hurt and may even incur losses on a number of projects.

Companies having worldwide supply chains could see tier 2 and tier 3 suppliers highly affected by disruptions related to the pandemic. Worse off, it explains that construction materials like “steel, wood, plaster, aluminum, glazed partition systems, cement and cementitious products, paints, HVAC equipment, electrical equipment, and light fixtures from China are expected to be delayed.”

For the company, cost-cutting has never been more important. While there are a series of strategies it could explore to augment the challenges, its growth right now depends largely on the speed of global economic recovery. This is because both the company’s input needs as well as its output in terms of the recommencement of projects, depends on the speed with which business as usual commences and the amount of time it takes for the industry to find a new balance for its operations.

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READ MORE: The “new normal” in business and economy

For investors, however, this presents a long term opportunity. Julius Berger currently trades at N15.05, falling 44.26% just within the last 3 months. The share price is also on the downside of its 52-week range (N14.42 and 22.92) and its price-to-book ratio of 0.6331 shows that the stock is undervalued.

While the company’s EPS is currently low at N2.52, investors who are willing to wait the time could find a gem in the stock particularly with the increased infrastructural needs born out of the population expansion which is taking place in many parts of the world in the years to come.

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Total Nigeria caught in the oil demand and lockdown saga

In Q1 2020, the company had recorded a revenue drop of 9.3% to N70.2 billion compared to Q1 2019.

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Total Nigeria caught in the oil demand and lockdown saga

The year 2020 was supposed to be a good one for the global oil and gas industry. Save for the unprecedented fangs of the Covid-19 pandemic, the IEA had forecasted in February that the global oil demand would grow by 825,000 barrels a day in 2020. On the contrary, lockdown measures restraining travel and other economic activities to contain the pandemic in many parts of the world had global oil demand down around 90,000 barrels a day from 2019. While the upstream sector had a direct hit owing to this reduced demand, the impact of the pandemic on the downstream oil industry caused the price of crude oil to fall significantly in a short period of time. GlobalData had forecasted that the energy sector would face downward earnings revisions of 208% in 2020.

READ MORE: Analysis: Total Nigeria needs a financial overhaul

With the pandemic leading to a slowdown in a wide range of business and personal travel, even gasoline demand had reduced and this has led to inventory challenges in both the distribution network as well as the refineries. In Nigeria, following the challenges of the pandemic, the federal government deregulated the downstream sector of the oil industry through the removal of fuel subsidy. While it presents a level playing field for the downstream oil private sector, it didn’t take long before companies like Total Nigeria plc. started caving into the overall reduction in inventory from the reduced demand for oil products in Q2 2020. Consequently, the company witnessed a 45% reduction in inventories from N33.6 billion as at 31st December 2019 to N18.5 at the end of Q2 2020.

READ ALSO: Nigeria’s Foreign Trade hits N9.18 trillion in Q3, as non-oil export rose by 374.5%

How the exogenous shocks affected an already ailing Total Nigeria

The success or failure of any organization depends on both the macroeconomic environment as well as the operations of the company itself. For Total Nigeria, the timing for the crisis had been off as it too had operational challenges to deal with. In Q1 2020, the company had recorded a revenue drop of 9.3% to N70.2 billion compared to Q1 2019. While the headwinds of the pandemic might have played a small role in the decline at least in the latter part of the quarter, the loss after tax of N163 million it had recorded was 65.6% better than the loss after tax of the  comparative quarter – a testament of the series of operational challenges it had from huge loans to raging expenses. While the company had set off on a strategic trajectory deploying a series of initiatives around cost efficiency, process optimization, as well as a significant reduction of working capital requirement and finance costs, Q2 had its own troubles waiting.

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Restrictions in the oil market had led to weaknesses across product lines. Total revenue fell by as much as 50% from N73 billion in Q2 2019 to N36.5 billion in Q2 2020. Revenues from petroleum products had contracted by 55.7% while lubricant sales also fell by 26.7% in the quarter. Across the company’s core business sectors comprising Networks, General Trade, and Aviation, revenue from aviation experienced the most decline, falling by 83.0%. Its performance can be predominantly attributed to the fall in demand owing to strict lockdown measures even in major Nigerian cities.

READ MORE: Five oil majors reduce value of their assets by $50 billion in Q2

Outlook

The outcome of the company’s internal and external challenges is a loss after tax of N373.9 million from N604 million in Q2 2019 – an alarming drop of 161.9%. However, its strategic intent is also visible. Net cash balance was a negative N19.6 billion at the end of the quarter, compared to negative N41.8 billion a year ago. Finance costs also declined by 76.1% to N830.3 million as the company sought to reduce its leverage position. In the same vein, borrowings came at N31.0 billion in Q2 2020 as opposed to the N39.9 billion in Q2 2019. Yet, the success of the company in the immediate future is somewhat bleak.

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This is because of the conditions of the oil market and overall economic landscape which is set to take a few years before returning to the norm as well as the financial and operational position of the company. That said, its earnings per share (EPS) of N4.37 and its price-to-earnings ratio of 18.12, reveal that the company has a good potential to make a rebound. However, it could take a few years. Hence, investors must be willing to wait for the long term. With its share price of N79.10 at the far bottom of its 52-week range of N78 and N129.50, it’s a great time to purchase its shares if you are willing to wait the long term.

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Implications of CBN’s latest devaluation and FX unification

This move portends significant implications for Nigeria’s public and private sector.

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Implications of CBN's latest devaluation and FX unification, current account deficit, IMF, COVID-19, CBN OMO ban could give stocks a much-needed boost , CBN’s N132.56 billion T-bills auction records oversubscription by 327% , Nigeria pays $1.09 billion to service external debt in 9 months , Implications of the new CBN stance on treasury bill sale to individuals, Digital technology and blockchain altering conventional banking models - Emefiele  , Increasing food prices might erase chances of CBN cutting interest rate   , Customer complaint against excess/unauthorized charges hits 1, 612 - CBN , CBN moves to reduce cassava derivatives import worth $600 million  , Invest in infrastructural development - CBN Governor admonishes investors , Credit to government declines, as Credit to private sector hits N25.8 trillion, CBN sets N10 billion minimum capital for Mortgage firms, CBN sets N10 billion minimum capital for Mortgage firms , Why you should be worried about the latest drop in external reserves, CBN, Alert: CBN issues N847.4 billion treasury bills for Q1 2020 , PMI: Nigeria’s manufacturing sector gains momentum in November, CBN warns high foreign credits could collapse Nigeria’s economy, predicts high poverty, MPC Member, BVN, Fitch, Foreign excchange (Forex), Overnight rates crash after CBN’s N1.4 trillion deduction, Nigeria’s foreign reserves hit $36.57 billion; Emefiele keeps his word on defending the naira, CBN to support maize farmers, projects 12.5 million metric tons in 18 months

The CBN devalued the naira by 5% at the end of last week, adjusting the official exchange rate to N380/$1  in a major move aimed at unifying the multiple exchange rate windows.

Whilst no official confirmation was issued by the apex bank, its website displayed the buying rate of N379/$1 and selling rate of N380/$1. Nigeria is clearly in a new exchange rate territory.

This move portends significant implications for Nigeria’s public and private sectors. Since March when the CBN last depreciated from N307/$1 to N360/$1, there have been calls for further depreciation to at least close the gap between the official CBN rate and the more market-friendly NAFEX exchange rate. The NAFEX rate has traded between N385-390 in recent weeks.

READ MORE: Manufacturing sector in Nigeria and the reality of a “new normal”

Government Finances

For the federal government, devaluing the naira solves two major issues:

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  • Firstly, it increases the amount available to share from the Federal Allocation (FAAC) between the FG and States.
  • Oil proceeds, which is a major source of revenue sharing for the government is deposited at the CBN and then converted to naira using the official exchange rate of N360/$1. The CBN’s latest devaluation suggests more money for the government as the conversion rate is now N379/$1.
  • Government taxes that are priced in forex but converted to naira also stand to gain a major earnings boost.
  • Custom duties, petroleum profit taxes, and other charges will now be converted at an exchange rate of N379/$1 or whatever new rate the CBN chooses, assuming it will work within the NAFEX band.
  • A second issue the solves is the condition precedent towards obtaining a $3 billion world bank loan. The government applied for a world bank loan as part of its N2.3 trillion stimulus expected to be injected into the economy.
  • It is understood that a unification of the exchange rate is critical to the disbursement of the loan.

Whilst these are positives, the government will record cost escalations for some if not all of its capital projects and expenditure. From vehicle purchases to furniture and fittings we should expect a spike except the contracts are fixed-priced.

READ ALSO: Explained: CBN’s powers to seize bank account of criminals

Private Sector

The impact of the latest devaluation will also be significant for the private sector.

  • While the private sector has recorded its own devaluation via the NAFEX and more recently the SMIS window, the impact of the CBN’s latest move will still be felt.
  • Most private pubic partnership projects, contracts are priced using the CBN official exchange rate. The price will now change to N379/$1 at the least.
  • The latest move could also lead to a reopening of forex sale to BDC’s which the CBN suspended in March as the Covid-19 pandemic ensued.
  • Sectors such as Power, Downstream Oil and Gas where the government has control over pricing will be significantly affected by the new price.
  • An example if fuel prices. With the exchange rate devalued again, fuel prices might increase if the impact of the exchange rate is reflected in the pricing template.

READ MORE: Expert simplifies FIRS’ newly-introduced stamp duty

NAFEX versus Official Rate

It is not clear how the latest round of devaluation affects the NAFEX rate and other separate rates currently in use by the CBN. Whilst the disparity has been closed somewhat, we still do not know if these windows will be retained or if we will just have two major exchange rate windows, the BDC and the NAFEX.

Most critics of the CBN’s forex policy prefer a uniform exchange rate that is floating or under a managed float system. The difference is that the CBN intervenes occasionally to ensure the exchange rate trades within its preferred band. It does this even if it means burning through its thin reserves.

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We expect a string of circulars in the coming days which will perhaps douse some of the confusion providing needed clarity to the exchange rate situation.

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