Analysts expect a naira devaluation of about 15 per cent in the weeks ahead, which would be around half the scale of the 27 per cent devaluation that occurred in November 2008. But the Central Bank of Nigeria (CBN) seems determined to protect the currency against all odds, including a sharp drop in oil prices and foreign exchange reserves. Will it succeed in this elusive task? COLLINS NWEZE writes.
The naira is under pressure in the interbank market, owing to strong dollar demand, the recent sharp fall in Brent oil prices (down by 23 per cent since late June), and uncertainty over the effect of the normalisation of United States’ monetary policy.
The currency has continued to depreciate against the dollar since November 2008. From N118 per dollar in November 2008 to about N172 last week, the naira has, no doubt, fallen from Olympic heights. It has, so far, lost close to seven per cent of its value this year.
Currencies Analyst at Ecobank Nigeria Olakunle Ezun said recent developments suggest an implicit devaluation has taken place but this needs to be confirmed based on developments this week.
He explained that due to the bearish outlook for oil prices, the CBN is under pressure to continue supplying dollar to support the plus or minus three per cent N155 exchange rate band.
Until recently, market participants were confident the CBN would step in to strengthen the naira if it weakened much below 165 against the dollar, Ezun said.
“In the last couple of weeks, once the naira got to 166, we were sure they’d come in and calm the market to send it back to about 165,” he said. “They seemed comfortable around 165.”
The naira was last devalued in November 2011 by lowering the midpoint of the target band to 155 per dollar from 150 to support growth in the economy.
Since mid-September this year, the CBN has used reserves to sell dollars outside of regular auctions held Mondays and Wednesdays, according to the Standard Chartered Plc. The absence of CBN intervention last Friday exacerbated the currency’s decline.
“They seem to be trying to tiptoe through this period. I expect they will be back in the market when conditions are more favorable for them and it looks less like they’re panic selling. The market would soak up every last dollar if they did that,” an analyst at Johannesburg-based ETM Analytics, Gareth Brickman, said.
Also, the Chief Investment Officer at Global Evolution AS, Morten Bugge, said the CBN has enough foreign reserves to defend the naira and will probably avoid devaluation before the general election in February. While foreign-currency reserves dropped to a three-month low of $38.3 billion, it is still enough to cover about seven months of imports, according to data compiled by Bloomberg.
“The chance of devaluing it now is close to none,” said Bugge, who oversees $2.3 billion emerging-market assets, including naira-denominated bonds. “The market is testing the central bank. The ball is in their court.”
The CBN, last week, banned paying for some imports, including electronics, generators and telecommunications equipment, using foreign-exchange bought at biweekly auctions. It also issued rules to lenders on accessing its standing deposit facility, according to a separate notice.
“We’re seeing more foreign-exchange flexibility. Perhaps they do not want to burn FX reserves unnecessarily. It’s a risky strategy though as the market will now look for the topside of dollar-naira and also because the lower rates will reduce the incentive to hold naira fixed-income assets,” head of Africa strategy at Standard Chartered in London,” Samir Gadio said.
Investors’ apathy persists
Foreign portfolio investors fearing heavy losses on the currency have pulled out with the Nigeria Stock Exchange Index hitting a 16-month low and the yield on government bonds rose 10 basis points last Wednesday.
Foreign reserves fell rapidly from a peak of $48.9 billion in May 2013 to just $36 billion in June. They have since rebounded slightly and are currently around $38.3 billion.
Despite these losses, analysts say that devaluation before the elections, when President Goodluck Jonathan will seek a second term, would be so unpopular that it’s unlikely unless oil prices, now at $82 a barrel, tumble further and force the bank’s hand.
“It will take some time of relatively low prices … before you see foreign reserves really being gobbled up,” Matthew Searle, senior African analyst at Business Monitor International, said.
“If oil prices fall further to the $60s or $70s a barrel, then the central bank will become the main source of dollars,” and will have to decide for how long it can keep up the fight.
Alan Cameron, London-based economist at Nigeria’s First City Monument Bank, thinks reserves would likely have to slide to close to $30 billion before a “last resort” devaluation would be considered.
Complex crises 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 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. Bismarck Rewane, chief executive officer, Financial Derivatives said that 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 that 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.
Failed promises?
The misfortune of the naira began early November 2008, when it first crashed to N120 to the dollar, down from N118. By the middle of the month, it fell to about N134 to the dollar. The free fall continued in the New Year. By the end of the first week of January 2009, the naira had fallen to about N144 to the dollar and the inter-bank foreign exchange market.
The situation became even worse at the parallel market as the currency exchanged for N147 to the dollar. It later fell to N160 to the dollar, causing greater shocks for international trade.
In its assessment of the Nigerian situation, Goldman Sachs described January 2006 to December 2008 as a period dominated by a stable trading and appreciation of the naira. It, however, warned that past performance does not guarantee future returns.
Against all odds, former CBN Governor, Prof. Charles Soludo, said he was taking full charge to bring stability to the economy and restore the glory of the naira. “I can tell you that those who have bought up dollars and are stock-pilling them in anticipation for profit will regret because it will soon bounce back,” he said.
His successor, Sanusi Lamido Sanusi, believed strongly on exchange the stability. Under his leadership, the apex bank consistently pursued a policy aimed at achieving exchange rate stability, banking sector stability and single digit inflation target.
The CBN supported the naira by selling foreign currency at twice-weekly Retail Dutch Auction System (RDAS) to keep the naira within a range of three per cent around 155 per dollar. An average of $600 million is used weekly to support the naira.
Sanusi’s successor, Godwin Emefiele, also promised to sustain his legacy on exchange rate stability. He said his administration’s key goal would be to maintain exchange rate stability. “In view of the high import-dependent nature of the economy and significant exchange rate pass-through, a systematic depreciation of the Naira would literarily translate to considerable inflationary pressure with attendant effect on macroeconomic stability.
“Therefore, under my leadership, the CBN will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency,” he said in his inaugural speech in June.
Emefiele said he would sustain the float regime in the management of the exchange rate, as this would allow the CBN to intervene when necessary to offset pressures on the exchange rate. To support this strategy, we will strive to build-up and maintain a healthy external reserves position and ensure external balance.
He admitted that reducing the interest rate and maintaining the exchange rate were very daunting twin goals. However, he said the CBN would work assiduously with all stakeholders to device countervailing measures that would ensure that these goals are mutually achieved.
So far, successive CBN regimes seem to have failed to protect the local currency from the value erosion, and this portends grave danger for the economy.
