Investors gauge CBN boldness in move to naira equilibrium

Nigeria’s Monetary Policy Committee (MPC) kicked off its two-day meeting yesterday, with investors left guessing as to how bold the Central Bank of Nigeria (CBN) led by Governor Godwin Emefiele, its governor, will go in a bid to put the naira closer to equilibrium through a devaluation.

“We see three potential scenarios for a currency devaluation, one which sets the current parity rate at NGN220/$, one at NGN250/$ and one at NGN300/$,” Renaissance Capital analysts, led by Daniel Salter, said in a January 20 note to investors.

“The first would win no confidence from the markets, in our opinion. The second has looked more plausible over 2015, but at the current oil price of nearly $30/bl, no longer looks sufficient to ease all dollar shortages. However, we think it would be good enough to warrant investors taking a fresh look at Nigeria, especially if they expect a rebound in the oil price. A shift to NGN300/$ would align the official and unofficial rates, and coincidentally put the currency at the implied fair value of our real effective exchange rate (REER) model.”

The naira has been all but fixed at N197-N199 per dollar since early March last year, after the CBN restricted banks’ ability to buy foreign-exchange, even as oil prices plunged.

The foreign exchange (FX) restrictions have led to a spike in the exchange rate in the black or unofficial markets, to near N290 per dollar.

Nigeria’s foreign exchange reserves are down by 2 percent or $0.6 billion year-to-date, to $28.3 billion as at December 22 as oil prices fell below $30 per barrel, data from the CBN show.

Some analysts say that while everyone is looking up to the CBN, at this point in time, unfortunately the CBN does not have all the sides to the puzzle.

“I look forward to seeing the CBN relax its administrative FX controls. On devaluation, I am not so bullish that the Apex bank will give up its stance just yet. Of course the argument is ripe and the market expects to see devaluation,” Abiodun Keripe, Head of Research and Strategy at Elixir Investment Partners Limited, said in response to questions.

“The co-ordination of fiscal and monetary policies is also important and going by just the President, his body language does not just suggest he agrees to a naira devaluation. If after proper assessment of all economic variables, the monetary committee vote for a devaluation, I’ll expect to see a 10% -15% devaluation range, though a 20%-30% devaluation will be considered bullish,” Keripe said.

The MPC, since the beginning of the oil slide crises has not been radically keen on attracting portfolio investors, preferring instead to stabilise price levels.

Nigeria’s inflation rate for December 2015 rose to 9.6 per cent, compared to 9.4 per cent in November, latest data from the  National Bureau of Statistics (NBS) show.

The CBN may be weary of devaluing the naira to a much weaker level in a bid to curb imported inflation.

Investors have largely sold Nigerian stock (down 16.33 percent year to date) and debt markets as a result of the slide in oil prices and defacto capital controls by the central Bank.

Some analysts say foreign investors getting involved in the Nigerian markets in the future will require a combination of higher oil prices, a shift up in USD-NGN and a more flexible FX trading platform, as well as a sharp pick-up in yields.

“Thus an exchange-rate adjustment in Nigeria would probably be positively perceived by portfolio investors (and even domestic corporates), but there is a risk that the market could see the move as insufficient to partly restore confidence in the NGN.

“In a low oil price environment, investors may also fear that pressure on the exchange rate will resume at a higher USD-NGN level. Overall, portfolio flows may be constrained by the oil price path, at least until there is a more supportive bias for commodity prices,” said Samir Gadio Head of Africa Strategy and FICC Research at Standard Chartered Bank, in response to questions.

PATRICK ATUANYA