• Tuesday, May 28, 2024
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Early calm returns to Nigeria’s FX market


The naira strengthened against the dollar across Nigeria’s multiple foreign exchange markets Friday after the Central Bank signalled a day before that it was prepared to keep the exchange rate stable against all odds.

To keep the naira stable, the CBN must contend with the impact of the coronavirus outbreak on crude oil demand, the price war between Saudi Arabia and Russia which has sent prices tumbling and a resurgent dollar which is riding on renewed investor interest in the world’s favoured reserve currency.

A dogged defence of the currency in spite of current realities will come at a cost to external reserves and could lead to higher interest rates and rising inflation in an economy still trying to recover from a record contraction in 2016.

The currency in Africa’s top oil producer appreciated by 1.6 percent against the dollar to $368 at the Investors and Exporters window from a record low N374 a day before.

The naira also gained 7 percent to N380 per dollar at the parallel market after weakening to as low as N410, traders said.

The panic-buying that hammered the naira cooled after the CBN said it had no plans to devalue the naira and threatened to rein in on what it called “speculative activities by unscrupulous players in the foreign exchange market” by charging them for economic sabotage. The apex bank declared it had enough reserves to meet legitimate foreign exchange demand.

That has sparked a divergence of views among market watchers.

Some traders and analysts say there are signs the dollar will appreciate in the coming weeks. Others say any naira appreciation amid the turmoil in the oil market will have to be driven by the CBN artificially propping the naira, which they say is unsustainable with the current level of reserves.

Down some 20 percent to $36 billion from $45.1 billion as of June 30, 2019, the CBN may only have firepower to hold the naira stable for so long.

The CBN governor told investors last November that the country could meet all FX demand as long as the external reserves stayed above $30 billion and oil prices above $45 per barrel. The reserves are still $6 billion higher than the mark but crude oil price is fast tearing away from the bank’s preferred level.

Oil price (Brent Crude) fell to $34 per barrel on Friday, 34 percent down from the peak of $68/barrel in January 2020, and is below the $57/barrel budget benchmark of the Nigerian government.

“It’s impossible for an oil currency to hold steady when the price of crude oil is down by a third and there are obvious challenges with demand,” one fund manager told BusinessDay.

“Investors following the oil market and Nigeria’s external reserves will not be convinced that the naira can be stable irrespective of what the CBN says, especially with the bank’s track record of always trying to resist the inevitable,” the person said.

“By saying market fundamentals don’t support a naira devaluation, the CBN is insinuating that the plunge in oil prices and the coronavirus pandemic are non-events and that’s naive.”

Nigeria is also struggling to sell its oil cargoes which are stranded as a result of the weak demand for the commodity.

Global investment bank, Goldman Sachs, said Friday that the oil market could see a record surplus of about 6 million barrels per day by April, considering a bigger-than-expected surge in low-cost output, while a slump in demand was “increasingly broad” triggered by the coronavirus outbreak.

The double whammy of falling oil prices and weak demand makes the task of the CBN to keep the naira stable more difficult given that Nigeria relies on oil exports for more than 90 percent of foreign exchange earnings.

Currencies of oil exporters from the Russian rubble to the Brazilian real have all slumped since the plunge in oil prices. The Saudi riyal has also declined, according to Bloomberg data.

That’s despite these countries having larger external buffers than Nigeria. Saudi Arabia for one has about $500 billion in external reserves. That’s more than Nigeria’s GDP and 14 times the size of its external reserves.

“The CBN can decide to stave off a naira devaluation for the time being but it will come at a steep cost to the already thinning external reserves which is not good for the economy,” an investment banker who did not want to be quoted said.

“This only adds to the uncertainty surrounding Nigeria. With the troubles of 2016 fresh in their hearts, no investor will want to bring money into the country without clarity around the naira,” the person said.

The CBN fought off a naira devaluation for 15 long months before succumbing in 2016 after an fx demand backlog of $7 billion left the apex bank with no options. There are fears the CBN could again resort to capital controls to resist devaluation before finally biting the bullet.

Backed by high oil prices since, the CBN has managed to keep the exchange rate stable for more than three years but insists the rate will remain.

A money manager said the CBN would need to raise interest rates considerably to attract the dollar inflows that will soothe the naira.

Despite Friday’s relief, the naira was down across all three markets on a weekly basis.