Update 2: Naira reversing gains under pressure from latent demand- Rewane

The black market naira is running out of steam as latent dollar demand returns to the market, says leading Nigerian economist, Bismarck Rewane.

When the naira exchanged for a premium of around N480-N500 against the US dollar, it curbed the appetite of businesses that found the dollar unaffordable at the said rate, thus shaving some demand off the market.

But after the currency became 20 percent cheaper against the dollar at the black market, following supply interventions by the Central Bank of Nigeria (CBN), these businesses are resurfacing to meet dollar needs they had abandoned, Rewane, who is Chief Executive Officer of Lagos-based Financial Derivatives Company (FDC), observed.

“The naira depreciation we have seen in the last three days is driven by speculative and latent demand, but more of the latter,” Rewane said by phone. “Some of the latent demand that submerged when the naira was not cheap enough is coming out now.

“The more the CBN tries to force down the exchange rate, the more latent demand returns,” Rewane added. The CBN has said it targets an exchange rate of N350 to the dollar and claims it will sustain its dollar supply to achieve that.

Nigeria, Africa’s second largest oil producer, has been gripped with dollar shortages since crude oil prices fell and militant attacks cut production by almost a third, triggering a currency crisis that left businesses scrambling for insufficient dollars and battered investor confidence.

The naira traded at N410/US dollar for the second consecutive day, Thursday, according to abokifx, which collates prices from traders in Lagos each day, compared with N398 to the dollar last week.

At the official window it closed at N306.10 to the dollar, against 306.20 per dollar last week.

The currency had gained 20 percent within one week, with the CBN selling around $2 billion in spot and forward contracts, before suddenly reversing gains this week.

Egie Akpata, a director at Union Capital Markets attributes the decline to banks insufficient naira holdings, which has limited their ability to buy dollars.

“There is a challenge in the market whereby there is limited naira to pay for dollars. The banks are running out of naira to buy much needed dollars,” Akpata said in an interview with CNBC Africa.

“You will notice that the interbank lending rate closed at 200 percent on Wednesday,” Akpata added.

Interbank lending rates rose sharply by around 100 percentage points on Thursday, as commercial lenders scrambled for cash to pay for bond purchases and cover their positions, traders said.

Overnight lending rates rose to around 300 percent from 200 percent at the end of Wednesday, as naira liquidity dried up in the banking system and some banks were forced to borrow from the central bank.

Rewane of FDC however says naira shortages will fizzle out when the Federal government releases funds to pay contractors.

Meanwhile, the CBN says it plans to begin forex auctions in the spot market and open a special window for foreign investors to trade freely and repatriate dividends, as part efforts to regain investor confidence.

“The question for investors is less about if they can repatriate their dividends but if they can repatriate their principal,” Akpata of Union Capital Markets said. “A number of investors still have their funds trapped in the country.”

The apex bank also plans to raise dollar sales to bureaux de change to $40,000 from the present $20,000.

 

LOLADE AKINMURELE