A recent report by Standard Bank projected a total of $5.05 billion in financial investments entering Nigeria’s Economy during the latter half of the year. By analyzing Nigeria’s historical Eurobond sales, the bank anticipates that the government could potentially issue a local bond denominated in dollars ranging from $3 billion to $5 billion. According to the report, the country’s anticipated balance of $1.05 billion from the NNPC crude pre-payment facility ($3.30 billion) in May was the foundation for its assumptions. It was reported that the Afreximbank confirmed the existence of crude oil linked to the facility.
The report noted that the Naira experienced significant fluctuations in exchange rates in April, with rapid appreciation and depreciation. However, due to the Central Bank of Nigeria’s (CBN) FX market liberalization and changes in methodology by FMDQ, the exchange rate premium between official and parallel markets has returned to pre-COVID-19 pandemic levels, aligning the official rate with market conditions. The Nigerian Autonomous Foreign Exchange Market (NAFEM) is experiencing a resurgence in FX inflows, reaching pre-COVID levels. This uptick is fuelled by a surge in foreign investments, marking a return to February 20 levels.
MPC expected to raise the MPR by 100 basis points.
After two months of growth, there was a sudden drop in inflows totalling $1.95 billion in April, down by 48.1% from the previous month. This decrease can be attributed to a significant decrease in foreign inflows (-68.9%, to $478.10 million) and local sources (-33.6%, to $1.47 billion), following a peak of $3.75 billion in March. The report projected that the Naira would reach ₦1,219.32 against the dollar by December 24, along with an increase in inflation. It also cautioned that escalating geopolitical tensions might lead to a decrease in foreign portfolio investment, which has been propping up the Naira in recent times.
Standard Bank anticipates the Monetary Policy Committee (MPC) to raise the MPR by 100 basis points during its upcoming meeting on May 20th. This projection is based on the bank’s analysis, which suggests that Inflation will reach its peak in May. Additionally, the report highlights a decrease in gross FX reserves of $2.3 billion from the year-to-date high of $34.45 billion on March 18 to $32.15 billion as of April 26. The recent decrease in FX reserves was attributed to a combination of repaying existing debts and the CBN’s decision to sell FX in order to bolster the naira.
Banks need an extra ₦4.1 trillion in capital.
Potential threats to the currency forecast consist of a scenario where fiscal policymakers revert to utilizing the CBN’s overdraft resources due to an expansive budget; a reversal of the CBN’s strict policies, resulting in a larger negative real Interest Rate differential, although this scenario appears improbable; a substantial decline in crude oil output, diminishing USD Revenue and potentially prompting the CBN to curtail foreign exchange transactions with BDCs and NAFEM; and a significant inflation surpassing our anticipated levels. Also, the Renaissance Capital (RenCap) report estimates that banks may need an extra ₦4.1 trillion in capital to meet regulatory requirements.
This amount comprised 61.3 percent of banks listed on the Nigerian Exchange Group (NGX) and 6.8 percent of the NGX’s total market capitalization. The report also predicted an increase in regional banks as those with national licenses restructure to meet capital adequacy requirements. In accordance with the CBN revised regulations, all banks were required to increase their equity capital. The projected capital requirements were detailed as follows: ₦2.3 trillion allotted for International Commercial Banks, ₦1.5 trillion designated for commercial banks, and ₦310 billion earmarked for regional and merchant banks.
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Commercial banks holding international banking licenses must increase their minimum capital to ₦500 billion, national banks to ₦200 billion, regional and merchant banks to ₦50 billion, non-interest national banks to ₦20 billion, and non-interest banks to a minimum of ₦10 billion under the current evaluation. The RenCap report anticipates that the majority of the additional capital injection will be sourced through a mix of equity funding opportunities, including rights/issues, private placements, and public offerings. These funding options are expected to attract support from both local and international investors.