Before the March 28 presidential/National Assembly elections, the dollar sold for between N228 and N230 at the black market. Many hoarded the currency, thinking that the election outcome will engender a crisis. They have now released the dollar, crashing the exchange rate to between N210 and N211, writes COLLINS NWEZE.
The foreign exchange (forex) market can be tricky. A split second decision by policy makers or a change in political economy could alter the market equilibrium. That was exactly what happened a week after the March 28 presidential elections.
Forex dealers and currency speculators who thought Nigeria would not be able to handle the election aftermath, were disappointed when nothing untoward happened.
Today, the re-conversion of the local currency to the greenback (dollar) has not only strengthened the naira, but has led to huge losses for the speculators.
President, Association of Bureau de Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, said the confidence in new leadership and the peaceful elections have helped to lift the naira. He expects the naira to appreciate further adding that although the market fundamentals, including the foreign exchange reserves and price of crude oil have not changed, but the peaceful conclusion of the presidential election, has curbed fear and uncertainty in the financial market.
“Before the elections, people were converting naira to dollar, which prompted the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele to disclose that more than half of term deposits were in dollar. The peaceful elections have calmed down a lot of nerves, prompting people that had stockpiled dollars to come out and change them to local currency,” he said.
Gwadabe explained that the practice has led to dollar glut in the market, despite the tight liquidity in the money market.
He said the forex reserves are at $29.8 billion, crude oil price is at $54 per barrel. These notwithstanding, the naira has been upbeat because market fundamentals alone do not determine exchange rate.
“The forex market goes with sentiment. It is not only the market fundamentals you look at when you talk of exchange rate stability,” he said.
Besides, the naira has traded in a range of 198 to 200 per dollar since March 3, and remained anchored even as stocks jumped the most in five years and bond yields plunged to four-month lows.
Trading restrictions
Analysts at Bloomberg predicted that the naira would face the prospect of a sell-off when the CBN removes trading restrictions imposed last year to reduce volatility. But the question for investors wanting to get back into Nigerian assets is when that will happen.
A money manager at M&G Ltd. in London, which oversees about $1 billion of emerging-market assets, Claudia Calich, said: “If you buy local bonds now, you have to factor in how much the currency will move. It’s a tricky proposition.”
The naira has slumped 18 per cent against the dollar as oil prices collapsed by almost half since June, prompting the apex bank lower banks’ trading limits and introduce a new dealing system in February that prevents lenders from buying dollars on the interbank market without matching orders from customers needing to import goods.
The CBN also sold dollars to support the naira, cutting foreign-exchange reserves to $29.8 billion, the lowest in a decade, according to HSBC Holdings Plc. Those measures have left the currency overvalued, according to investors including M&G, BlackRock Inc. and Investec Asset Management.
“One of the first big challenges the new government is going to have to face is what on earth to do with the naira,” Samuel Vecht, who oversees $2.7 billion in five emerging-frontier-market funds at BlackRock, said by to Bloomberg by phone from London, said: “Steps have to be taken to ensure reserves don’t keep falling.”
Gen. Muhammadu Buhari’s (rtd) win over President Goodluck Jonathan marks the first democratic transition of power from one party to another since Nigeria’s independence from Britain in 1960. A former military ruler in the 80s who lost the three previous elections, Buhari has pledged to clamp down on corruption, boost growth and create at least one million jobs a year. He won 52.4 per cent of votes cast, according to tallies by the electoral authorities.
Nigerian assets mostly soared as Jonathan’s concession to Buhari, who will be sworn in on May 29, suggested the transition will be smooth.
Stocks climbed 8.3 per cent, the most among 93 global primary indexes tracked by Bloomberg. They gained another 3.4 per cent on last week, reversing losses for the year, having been down 20 per cent by February 13.
Yields on Nigeria’s $500 million of Eurobonds due 2023 fell 19 basis points to 6.02 per cent on, the lowest since December 8, and rates on benchmark naira bonds dropped 118 basis points to 13.81 per cent, also the lowest since Dec. 8.
Money changers
While naira forward contracts traded offshore and exempt from the CBN’s restrictions, also rallied, they still suggest the currency’s depreciation is far from over. Naira six-month non-deliverable forwards fell 2.8 per cent to 233.50 against the dollar, the lowest since January 22.
The currency changes hands among unofficial money changers at 226, Alan Cameron, an economist at Exotix Partners LLP in London, said in a March 19 note.
The naira’s current interbank value is appropriate and the discrepancy between that and the parallel rate isn’t an indication that it’s under pressure, Emefiele said at the last Monetary Policy Committee meeting on March 23 to 24.
The CBN may end the so-called order-based trading system introduced in February now elections are over, according to the Lagos-based Financial Markets Dealers Association, an industry body.
Other policy-makers speak
Sub-Saharan Africa Economist at Renaissance Capital and co-Author of the Fastest Billion Yvonne Mhango said the CBN has shown absolute commitment to dealing with dwindling fortune of the naira.
She said while Nigeria cannot do much to influence the oil price, the combination of measures sends a powerful signal to all stakeholders on the CBN’s intent to do what it can to preserve macroeconomic stability.
CBN takes action
Emefiele said the CBN under his leadership remains committed to safeguarding the value of the naira. For instance, the lender recently banned the sale of foreign exchange by banks to importers without the requisite shipping documents.
It also directed that only imports, which are backed with evidence of shipment and other relevant documents, will qualify for purchase of foreign exchange. Only such transactions will be eligible for foreign exchange purchase via the RDAS or the interbank window, it said.
The apex bank said henceforth, all importations involving electronics, finished products, information technology, generators, telecommunication equipment and invisible transactions would be funded from the interbank foreign exchange market only.
The policy, the CBN said, was to maintain the existing stability in foreign exchange market and strengthen the various policy measures, already initiated, including the regulation of the Bureau De Change (BDCs) that cut dollar supply to operators from $50,000 to $15,000 weekly. These measures, Emefiele admitted, would help conserve the foreign exchange and support the naira.
Complex crisis get worse
The misfortune of the naira seems complex. The thinking is that massive inflow of forex from surging oil prices and the boom in the capital market were responsible for the appreciation of the naira in the past few years. Unfortunately, oil prices have nosedived and Nigeria capital market is in a shambles. The fall in the price of oil has major consequences on government revenue, aggregate output, capital formation investment, employment, trade and fiscal balance.
The 2008 global financial meltdown also contributed to the naira’s freefall. Chief Executive officer, Financial Derivatives, Bismarck Rewane, said Nigeria was unprepared for the shock. “The Nigerian economy believed to be one of the most resilient in the world was caught unawares by the global crisis,” he said.
Analysts said a gradual appreciation of the currency will require building confidence in the financial system and price of crude oil in international market.
“This is what is going to drive the exchange rate now and beyond; we cannot isolate what is happening in the global economy like the issue of diversification of energy sources,” they said.
Historical view of the naira
From 1980 to 2000, the naira depreciated by N101.50 to N102.10 to dollar, when compared with N0.6 to dollar it traded as at 1981. Not even the Structural Adjustment Programme (SAP) introduced in 1985 could have predicted this sharp slide.
The currency first hit double digits, moving from N9.9 to a dollar in 1991 to N17.2 to a dollar the following year. That constituted a significant 73.7 per cent change. Thereafter, a gradual slide ensued, attaining triple digits in 2000.
Although it was considerably stable between 2000 and 2003 (below N120 to a dollar), the recent adverse global capital flows and drop in oil price, among other factors, have culminated in the current all time low.
Moreover, decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds or borrow from other central banks.
That explains why the CBN has found it increasingly difficult to defend the naira. The solution, according to analysts said, lies in diversification of the economy.
For now, the continued decline in oil receipts poses a threat to government revenues, limiting the fire power to regulate the naira. Should this continue unabated, the naira’s misfortunes will worsen and the N100 banknote will no longer buy a small loaf of bread for a minor, let alone kill hunger.
