Nigeria’s central bank has enough firepower to stave off a devaluation of the naira until at least next year, even as one of the world’s most stable currencies comes under pressure with oil prices tumbling and reserves dwindling, according to a Bloomberg survey of 19 investors and analysts, both local and foreign.
All but four of them said the heavily-managed naira is more than 10% overvalued against the dollar. Two respondents said it was at least 20% too strong.
Naira non-deliverable forward contracts fell on Wednesday, suggesting that devaluation pressure is easing. But three-month forwards still trade at 371.5 per dollar, around the highest since August.
The currency has traded around 360-365 per dollar since its last devaluation in 2017.
While the central bank says the exchange rate is determined by the market, it is much less volatile than other oil currencies such as the Russian ruble and Kazakh tenge. A fall of 10% would take the naira to around 400, while a 20% drop would see it at 450.
Only five participants in the survey predict a significant fall in the currency this year. Ten see that happening in 2021, while the rest believe the central bank will keep a firm grip until 2023, the year President Muhammadu Buhari’s term will end.
They were evenly split on the size of the devaluation, with nine predicting the naira will drop 10% or less and the same number saying it would be marked down by 10% to 20%. Only one forecasted a fall of more than 20%.
Since June, Nigeria’s reserves have fallen 17% to $37.5 billion, the lowest in more than two years.
The slide’s accelerated since the coronavirus outbreak in China rocked global markets and sent Brent crude prices down to around $55 a barrel.
Last week, reserves in Africa’s biggest oil producer fell by $350 million, the most on a weekly basis since October.
All but three of the respondents said reserves would have to drop to $30 billion before the central bank let the currency fall — in line with what Governor Godwin Emefiele told investors last year.
The central bank may see its buffers replenished soon after President Buhari asked lawmakers to approve a sale of $3.3 billion of bonds.
The government will embark on an international road show once politicians give their permission, said a finance ministry spokesperson. That could take the country’s external reserves to around a healthy $40bn.
“The planned Eurobond sale will temporarily ease investors’ concerns, but that will hold only if the level of reserves stays put in the long run,” said Guy Tossou, a portfolio manager with BNP Paribas in London.
The central bank has restricted importers’ access to dollars to keep the naira steady. It’s also backed the government’s closure of some land borders, designed to stop smuggling of food and other foreign goods.
Buhari has made currency stability a key pillar of his plan to revive an economy still reeling from the collapse of oil prices in 2014.
The former army general has previously said that weakening the naira would stoke inflation, which already stands at a 20-month high of 12%.
The specter of a devaluation has reduced appetite for the Nigerian carry trade — one of the world’s most lucrative over the past year — in recent months.
“The reserves-accumulation trend is reversing and of course that raises a lot of questions among the portfolio investors,” said Tossou of BNP Paribas. Still, he doesn’t expect a devaluation until 2022.
Societe Generale SA recommended to investors last week that they exitnaira-denominated short-term debt.
