Nigeria Third Quarter 2016 Trade Deficit Narrows on Currency Controls and Weaker FX Rate

LAGOS (Capital Markets in Africa) – The National Bureau of Statistics (NBS) released Q3: 2016 Foreign Trade Statistics on 1st December 2016. The report showed Q-o-Q improvement in trade deficit which narrowed to the lowest in 2016 as an impact of the weaker exchange rate in the period inflated exports data (reported in Naira) while currency controls pared growth in imports. Trade deficit improved 78.5% Q-o-Q to N104.1bn from N484.2bn in Q2:2016 while Merchandise trade (sum of exports and imports) rose 16.3% Q-o-Q and 17.9% Y-o-Y to N4.7tn. The Naira reporting currency, however, made the trade numbers flattering due to large exchange rate movements within the period. In Dollar terms, trade deficit compiled from CBN data narrowed 57.0% to US$620.0m while merchandise trade fell 18.4% Q-o-Q to US$16.3bn.

The improvement in the trade deficit was mainly driven by exports which surged 29.1% Q-o-Q to N2.3tn – as oil exports jumped 30.9% Q-o-Q to N1.9tn (84.2% of total exports) against the backdrop of the weaker exchange rate which offset the lower volume of oil exports. Interbank exchange rate averaged N303.18/US$1.00 in Q3:2016 compared to N208.59/US$1.00 in Q2:2016 while oil production was weaker by 3.0% Q-o-Q (1.63mb/d versus 1.68mb/d). The relatively weaker exchange rate did not fully constrain imports as CBN tightened currency controls while consumption and investment expenditure in the economy were inhibited as shown from recent GDP numbers. Consequently, imports grew only 6.2% Q-o-Q to N2.4tn.

Nigeria expectedly mainly exported mineral resources which constituted 97.3% of total exports in the quarter while top destinations for exports were Europe (33.3%), Asia (29.1%) and Africa (16.1%). Imports, however, remain diversified with Mineral Resources, Machinery and Appliances and Chemical & Allied Products accounting for 30.9%, 19.7%, and 9.1% respectively. India was Nigeria’s top destination by export with 25.4% share of total exports whilst China, with 27.2% of imports, was Nigeria’s largest import partner.

We expect another improvement in the trade deficit in the 4th quarter due to rebound in crude oil production and rally in oil prices. In addition, capital control policies, scarcity of FX and declining real wage will continue to limit import volumes. However, we believe the projected improvement in trade balance will have muted impact on capital inflows and domestic economic performance due to capital control policies and FX rate peg tapering investor confidence.

Source: Afrinvest West Africa