Nigeria’s Refusal to Devalue Naira Likely to Fail, Again
Four years after Nigeria tried and failed to stop its currency from collapsing, Africa’s biggest crude producer is again reacting to this oil crisis the same way it did in the recent past.
It worked out badly then as oil revenues, which account for 90% of foreign-exchange earnings, failed to rebound in time -- leading to a depletion in the central bank’s fire power to defend the naira. It will likely fail again, if the West Africa nation sticks to the same template.
A surge in supply after OPEC failure to agree on production cuts with Russia has combined with reduced demand as the coronavirus pandemic disrupts economies globally. This means crude prices will remain low far longer than the central bank’s dwindling reserves can support the currency, which has weakened the least among major oil producing countries in 2020.
The naira weakened slightly last week after crude prices crashed, but since has remained largely stable. Nigeria’s President Muhammadu Buhari considers a stable naira as a keystone in his plan to bolster and wean the economy off oil. In a rare public acknowledgment he indicated that the pandemic could trigger a foreign exchange re-alignment after he met with his new economic advisory council, according to a statement emailed on Thursday.
Buhari agreed with the council, led by orthodox economist, Doyin Salami, that “tough economic decisions” may be needed to face the crisis,the presidency said . But the central bank, which has kept the currency in a quasi-peg to the dollar since mid-2017, has said it has no plans for a devaluation and threatened to investigate any local currency dealers suggesting otherwise.
“The administration will fight tooth and nail to avoid a devaluation in the short-term,” said Malte Liewerscheidt, vice president at Teneo Intelligence in London.
The reason -- Nigeria’s import dependent economy has seen inflation accelerate to a 22-month high in February and could rise even faster if the currency weakens. Despite being oil rich, the West African nation imports almost 100% of its gasoline due to mismanagement of its domestic refineries. The fuel is then sold at subsidized prices to Nigerians. A weaker naira would raise the cost of those subsidies, which already consumes a chunk of government revenues at almost $2 billion a year.
The central bank has blamed speculators for any weakness in the currency and the Economic and Financial Crimes Commission said its agents are raiding hotels and bureau de change outlets to arrest offenders hoarding foreign currency, a tactic used after crude prices crashed in 2014.
The regulator “is poised to apply the toolbox developed during the 2014-16 oil price crisis,” said Liewerscheidt. “Providing high yields and preferential foreign-exchange access to portfolio investors while curbing demand by other market players through measures such as import bans and rationing.”
The local currency traded at 368 per dollar as at 4.30 p.m local time on Wednesday, about 1.9% weaker since the oil price crash. Prices for 12-month forward contracts have risen to 479 per dollar, suggesting investors see the naira falling 25% in that period.
The majority of investors and analysts surveyed by Bloomberg believe the naira will eventually be devalued by as much as 15% in the third quarter.
Reverting to past measures, Central bank Governor Godwin Emefiele plans to tighten capital controls by banning forex for hand sanitizers needed to curb the spread of the coronavirus, adding it to dozens of items already barred from accessing foreign exchange.
“Active management of foreign-exchange allocation could create scarcity and delays in allocation which will inevitably push importers to seek dollars at the unofficial segment,” Lagos-based Nova Merchant Bank said in a note to clients on Tuesday.
However, foreign-currency reserves have decreased by 20% in the past two years to the lowest since November 2017, giving little room for the nation to support the naira.
Goldman Sachs Group Inc. said last week it would take an exchange rate of 600 naira per dollar for Nigeria to generate a healthy current-account surplus at today’s oil prices.
A sustained period of low crude prices will weaken dollar liquidity and elevate banks asset risks, Moody’s Investors Service said.
Average yields on naira government bonds have surged 709 basis points to 12.6% since January, according to data compiled by Bloomberg, signaling outflows resulting from falling risk appetite of investors.
The bearish sentiment is expected to continue as coronavirus fears persist, Johannesburg-based Rand Merchant Bank said in a note on Wednesday.
“The market still grapples with limited dollar supply ---as the oil price remains at abysmally low levels,” according to RMB.
©2020 Bloomberg L.P.