Oil slump rings alarm bells for Nigeria as elections loom

Nigeria’s efforts to prop up its currency months before presidential elections are being undone by the slide in oil prices, reports Bloomberg.

The naira tumbled to within 0.3 percent of a record low as Brent crude fell to the lowest level in more than four years. While some of the world’s biggest banks say the collapse in oil is just about over, further losses would force Africa’s largest producer to choose between raising interest rates, eroding foreign-exchange reserves or, eventually, devaluing the currency, according to Exotix Ltd., a London-based investment bank.

“We’re getting close to the point where the alarm bells are ringing loudly,” Angus Downie, the head of economics research at Ecobank Transnational Inc. in London, said by e-mail on Monday. “If oil prices continue to slide before the election, foreign-exchange reserves will come under pressure, and that’s when the authorities would be expected to adapt fiscal and monetary policy to the new oil-price regime.”

A weaker currency would boost the cost of importing everything from fuel to food, threatening support for President Goodluck Jonathan, who’s already under pressure for failing to stem deadly attacks by Islamist militants. Nigeria joins Russia, Colombia and Venezuela as the biggest losers from the decline in oil, according to Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London.

Nigeria is the continent’s biggest producer of crude, which accounts for about 80 percent of government revenue. The country also imports about 70 percent of its fuel needs because of inadequate refining capacity.

The Central Bank of Nigeria (CBN) has supported the naira since mid-September by using its reserves to sell dollars outside of twice-weekly auctions, according to Standard Chartered Plc. At those auctions, it offers the local currency at a price of N155 per dollar, plus or minus 3 percent.

Calls made to the office and mobile phone of Ibrahim Mu’azu, the spokesman for central bank, didn’t connect.

The naira is weaker than that in the open interbank market. It fell to N165.83 per dollar on October 13, the lowest level since it reached a record N168.9 on February 20. The currency dropped 0.1 percent to N165.43 per dollar as of 11:27 a.m. in Lagos, the lowest level on a closing basis since February 25.

While the intervention helped prevent the currency from being among the worst performers in emerging markets this year, reserves are starting to erode, falling to $39.3 billion last week from almost $39.7 billion in early September.

The naira has weakened 3 percent versus the dollar in 2014, headed for its biggest loss since 2011. That compares with declines of 23 percent for Argentina’s devalued peso, 20 percent for Russia’s ruble and 4.5 percent for the South African rand.

Brent crude for December delivery has fallen 26 percent since reaching a peak in June, and settled at $85.40 on Monday. It dropped to $82.93 on October 16, the lowest since May 2010. Bank of America Corp. and BNP Paribas SA predict prices will hold above $80 a barrel.