The Naira buckled and Nigerian equities withered last week following the exit of foreign investors from the financial markets.
The Nigerian Stock Exchange (NSE) that had remained bullish tumbled in mid-week trading, building up a whooping loss of N888 billion within last three trading days of last week culminating in a decline of 5.85 per cent.
The declines across Nigerian financial markets echoed the turbulent global financial markets, amid concerns about the prospects of world’s leading economies.
Market sources said the depreciation across the markets was driven by foreign portfolio outflows as global funds sought to lock in profit or back up their central positions. Expectedly, this development exerted pressure on the Naira, which fell 0.8 per cent to N162.60 a dollar taking its weekly decline to 1.8 per cent. It was the worst performance since the five days through December 23, 2011 based on data compiled by Bloomberg.
At the black market otherwise known as the unofficial market, the Naira, which opened last week at N159 per dollar closed at the weekend at N163 per dollar. The depreciation partly reflected strong corporate demand for dollar, and to a lesser extent upward trending bond yields that signals likely foreign divestment out of the bond market.
But the CBN has assured that it’s ready to defend the naira and move the currency back to within the plus or minus three per cent of N155 band.
CBN Deputy Governor, Economic Policy, Dr. Sarah Alade, who gave this assurance in a chat with The Nation at the weekend, urged operators in the financial markets not to panic.
She said: “With our reserves at $49.35billion as at Thursday June 13, 2013, investors do not have any reason to worry at all. The CBN is still committed to making the exchange market stable. The movement outside the band is just a temporary measure.”
Asked to confirm if foreign investors were actually exiting the equities and bond markets and repatriating their funds, the deputy governor said she could not authenticate that but the picture would be clearer today.
In a bid to defend the exchange rate, the banking watchdog has been intervening in the bi-weekly official foreign exchange market (Whole Dutch Auction System) by increasing its dollar sale and had mopped through Treasury Bills and bonds a total of N7.6 trillion from the economy this year. Data from the CBN shows that forex sales at WDAS increased from an average of $162 million per session in the first quarter to $285 million from April to date.
Nigerian financial markets are substantially susceptible to global market’s turbulence with foreign investors and companies dominating trading in Nigerian financial assets. Latest update shows that foreign investors accounted for 64.48 per cent of total transaction value at stock market in April, the last available data, a substantial increase on 52.78 per cent they recorded in March when they displaced domestic investors as the most influential investment block.
However, last week’s decline came amidst concerns that a combination of continuous decline in global crude oil prices and domestic crude oil production could lead to depletion of external reserves, exchange rate instability and increased debt and higher fiscal deficit.
Recent report by the Nigerian Bureau of Statistics (NBS) showed that Nigeria’s economic output in the first quarter slipped by 0.43 per cent to 6.56 per cent in the first quarter of this year as against 6.99 per cent recorded in the previous quarter-fourth quarter of 2012. The decline was largely due to poor output in the oil sector which led to a 1.05 per cent decline in the sector’s contribution to Gross Domestic Products (GDP) to 14.75 per cent.
Global oil prices had declined considerably in recent period. Nigeria’s bonny light crude currently trades at $107.5pb, 7.2 per cent lower than $115.3 per barrel (pb) in first quarter 2013 just as Nigeria’s oil output declined to 1.94 million barrel per day (mbpd) in April. The decline in global oil prices is largely due to demand concerns and the continuous uncertainty in Europe. Domestic oil output has also been negatively affected by several disruptions such as pipeline vandalism, bunkering and force majeure.
Financial Derivatives Company noted that the declining price and output imply a shortfall in federal government revenue as a result of Nigeria’s ultra dependence on oil, estimating that Nigeria might have since lost some 6.8 per cent of its oil revenue of $1.85 trillion in first quarter 2013.
According to analysts, a further decline in global oil prices to $90pb will be devastating for the Nigerian economy, as the reverberations of the shocks will hamper any form of growth across all sectors of the economy.
All these could be compounded by possible increase in the government spending in view of the military action in some Northern states, which poses potential risks to inflation and exchange rate.
“Given that oil prices, notably bonny light crude, decline to $90pb, Nigeria could see a further decline in its growth rate by 1.5per cent. Also, oil revenue would immediately decline by 30 per cent or $2.4 billion per month in nominal terms. This will cause a rapid increase in government borrowing, add to the current total government debt of N8.7 trillion and increase the nation’s fiscal deficit beyond the current target of 2.85 per cent of GDP,” analysts at FDC had noted.
They pointed out that as the value of the naira falls at the parallel market and the likelihood for capital flight increases, external reserves could be depleted by about $10 billion to $15 billion from the current level of $48.5 billion. The resultant $33.5 billion to $38.5 billion will only cover an average of eight months of exports, which may lead to increase in Nigeria’s borrowing.
“The implications of a further decline in oil prices paint a bleak picture for the Nigerian economy,” FDC stated.
Analysts, however, noted the possibility of an upturn in global economy, which may also positively impact Nigeria’s economic outlook and stave the economy from austere future.
