Dealers pulled the plug on electronic trading in the naira currency on Wednesday after it slid past the key level of 200 to the dollar on fears the postponement of this week’s election could trigger a constitutional crisis.
Deploying for the first time a ‘circuit-breaker’ agreed among themselves last month, leading banks in Lagos halted trade after the naira dropped more than 2 percent.
At its weakest, it was quoted at a record low of 204.25 to the dollar, a decline of 20 percent since the start of November.
The rout has been driven by the combination of a tumbling oil price and a rise in political risk, highlighted last Saturday when authorities pushed back the Feb. 14 presidential election by six weeks, blaming an Islamist insurgency by Boko Haram militants.
The vote is seen as a close contest between President Goodluck Jonathan and former military ruler Muhammadu Buhari, who has said the postponement was engineered by the ruling party.
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It was not clear when normal currency trading in Africa’s biggest economy might resume. Although the halt is meant to calm nerves, it undermines Nigeria’s credibility as a smoothly operating capital market and could trigger its ejection from a key JP Morgan emerging market bond index.
In the year after Nigeria joined the index in October 2012, foreign bond-holdings jumped from $1.2 billion to $5.4 billion, but JP Morgan said last month Nigeria’s inclusion was under review because of a lack of market liquidity.
Ejection from the index would trigger major capital outflows because investors who track it would have to sell Nigerian bonds. That would exacerbate a budget crunch in Abuja by removing an important source of funding and further hammer the currency.
In another sign of strain on the financial system, the rate banks charge each other for overnight lending spiked to 100 percent this week as the central bank sucked up naira to support the currency rather than continuing to leak foreign reserves.
“The tighter the liquidity to maintain the currency at current levels, the less likely JP Morgan is to keep them in the index,” said Renaissance Capital analyst Charles Robertson.
“That will make it harder for them to attract budget financing flows, and at a time when oil is cheap that’s not helpful.”
Last year the central bank spent an average of $20 million a day defending the naira, burning through 20 percent of its reserves in an attempt to offset the halving of the oil price. Crude oil accounts for more than 90 percent of Nigerian foreign exchange.
RUNNING DRY
During their self-imposed hiatus, dealers continued to trade naira over the telephone. Even after the central bank intervened by selling an unspecified quantity of dollars, they were still reluctant to quote two-way prices.
“Liquidity dried up but the naira was still depreciating,” one dealer said. “So everyone stopped quoting on a two-way basis.”
The naira is officially pegged at 160-176 against the dollar after an 8 percent devaluation in November but it has rarely traded within that range, and most analysts reckon authorities will have to devalue again.
Non-deliverable forwards — contracts used to bet on future exchange rate moves — price the naira as much as 30 percent weaker in a year’s time.
The central bank was widely expected to make its move after the election scheduled for Feb. 14, but the decision to postpone it until March 28 has rattled investors.
Speculation is swirling that the date could be pushed back again, pitching Africa’s top oil producer and most populous nation towards a constitutional crisis.
President Jonathan’s mandate expires on May 29, and the constitution says an election must be held 30 days before that date.
Lagos-based Femi Falana, one of Nigeria’s leading lawyers, has called the postponement “a coup against the constitution by the security chiefs” and said the precedent created made it easy to justify further delays.
“Having used (the security forces) to shift the election, what’s to stop them saying there will be no election?” he said.
