Pressure Mounts as Naira is out of Step with Oil Peers
The Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, is losing the battle to prevent the naira from going the way of other oil-dependent currencies.
According to a report, after imposing trading restrictions in February to prevent dollars from fleeing the economy, importers have been unable to pay suppliers, a thriving black market has sprung up in foreign banknotes and teachers have gone unpaid.
The report noted that the naira has been stable over the past six months since the central bank introduced regulations to halt a 20 per cent decline in the currency in the 12 months through February 12 to a record low of 206.32 per dollar.
“That’s heaping pressure on the authorities to ditch the rules and let the naira weaken alongside Russia’s ruble, Colombia’s peso and Norway’s krone. Forwards prices suggest the currency of Africa’s biggest oil producer will tumble 15 per cent within six months and 25 per cent over the next year.
“Their currency is still very overvalued and so they’re going to remain under pressure to allow it to depreciate,” said Gareth Brickman, an analyst at Stamford, Connecticut-based ETM Analytics. The central bank has fought depreciation “tooth and nail, every step of the way,” he said.
Emefiele, 54, has said the exchange rate is “appropriate” and argues that allowing it to weaken would stoke inflation in a country that imports almost all its manufactured goods. The strong currency and a scarcity of dollars are hurting growth, which the International Monetary Fund (IMF) estimates will be 4.8 per cent in 2015, less than half the average over the past decade.
Traders are wagering Emefiele will have to change tack and abandon efforts to crack down on speculators. He bolstered the rules after a strategy of burning through foreign reserves failed to stop the naira from sliding.
ETM’s Brickman predicts the central bank will be forced to devalue the currency by about 10 per cent by year-end to 220 per dollar, from 199 at 2:09 p.m. in Lagos yesterday.
Currency trading has “dropped dramatically” under the new rules, said Craig Thompson, a broker at Nyon, Switzerlandbased Continental Capital Markets SA. “It’s a fraction of what used to go through.”
The trading curbs, together with the more than 50 per cent drop in oil prices since mid-2014, are weighing heavily on Nigeria, which relies on crude for almost all its foreign earnings. Banks are increasingly wary of lending to individuals and Nigeria’s main stock index has dropped 16 per cent since the start of April, matching the decline in the whole of 2014.
Ibrahim Mu’azu, a spokesman for Nigeria’s central bank, defended its currency policy and said authorities would meet companies’ legitimate demand for foreign exchange.
Scrapping the rules is all but inevitable to many traders, making a weaker naira an obvious bet.
Standard Chartered Plc, which gets more than half its revenue from emerging markets, predicts a decline to 222 by year-end, while Goldman Sachs Group Inc. sees it falling to about 230. Forward prices compiled by signal levels of 228.15 in six months and 248.5 in a year.
Emefiele, a former chief executive officer of Zenith Bank Plc, Nigeria’s second-biggest lender by market value, isn’t the only African policy maker trying to protect his currency against the drop in oil.
Angola’s kwanza, which has slumped 23 per cent in the past year, has been little changed this month as the nation props up the exchange rate by spending reserves and rationing access to dollars.
As with the naira, that’s just storing up losses for the future, said John Ashbourne, an Africa economist at London-based advisory firm Capital Economics Ltd.
He sees the naira falling as much as 8 per cent to 210-215 per dollar and the kwanza losing up to 15 per cent of its value by yearend. China’s yuan devaluation this month has increased pressure on their central banks to devalue, Ashbourne said.