EFG Hermes, financial services corporation in frontier emerging markets, says the release of the $3.35 billion Special Drawing Rights (SDRs) by the International Monetary Fund (IMF) is expected to stabilise the foreign exchange market.
In a report entitled: All eyes on Eurobond following the SDR allocation , Head of Macro Economy, EFG Hermes, Mohamed Basha, said the SDR allocation has boosted foreign reserves by the equivalent of $3.35 billion.
He said the upcoming Eurobond issuance, likely to be around $3 to $5 billion, would mean that a $7 billion reserve boost would be available to the CBN.
“We anticipate the CBN to use this by devaluing the Naira to N430/440, pushing the parallel rates ( trading at N522) to converge on the said range. We believe the devaluation, which would still add some inflationary pressure, should be accompanied by a tightening of monetary policy to bring interest rates to levels that are attractive to foreign investors.”
“Tightening of the monetary policy will, therefore, be a key indication, in our view, as to how serious CBN is in resolving the country’s forex shortages,” he said.
Continuing, he said setting the weak growth backdrop aside, we direct our focus to the upcoming Eurobond issuance – planned for September – as it is a potential trigger for much-awaited forex adjustment.
“As we mentioned in our previous reports, we were looking forward to the SDR allocation and Eurobond providing valuable ammunition, thereby enabling the CBN to bring Forex markets under control,” he said.
Also, Trading Desk Manager, AZA, Global Forex Dealer, Murega Mungai, said the IMF’s SDRs allocation would bolster the nation’s foreign reserves levels, improve dollar liquidity and prop up the naira in the coming days.
In an emailed report to investors, Head of Trading, AZA, Michael Nderitu, said the IMF’s record $650 billion SDRs distribution for world economies came into effect earlier last week, with the fund’s Managing Director Kristalina Georgieva calling on wealthy nations to divert some of their funds to poorer countries that need greater economic support amid the COVID-19 pandemic, particularly in Africa—which has only been allocated $33 billion.
Nderitu said some 70 per cent of the SDRs programme, which is designed to help countries bolster their foreign exchange reserves and instill confidence in the global economy, has been allocated to the 20 largest of the fund’s 190 member states.
Just $21 billion, or three per cent, of the reserves will go to low-income countries. In June, the Group of Seven advanced economies endorsed a plan to reallocate $100 billion of the fund’s reserves to poorer countries.
– The Nation