Naira pressure to increase on China devaluation

China’s move to end the Yuan’s de facto peg with the dollar and the potential for a new currency war – as its trading partners react – is the latest catalyst for declines in emerging-market currencies including the naira, say analysts.

Nigeria is exposed to China in terms of oil exports (as the U.S market dries up), and more recently the seven percent of foreign currency (FX) reserves Nigeria has denominated in Yuan.

“We are not looking for a re-run of the Latin American debt default – although we are keeping an eye on the significant build of Eurobond debt by banks and quasi-financials in the commodity exporting EM world,” Charles Robertson, Global Chief Economist at Renaissance Capital, said in an Aug. 11 note.

“However, we are still looking for devaluations – a good 15 percent in Nigeria, at least 10 percent in Kazakhstan, nearly 10 percent in Kenya, and nearly 20% in Ghana.”

Nigeria’s currency the naira has fallen 22.8 percent against the dollar in the past year (moving from N162.3/$ to N199/$) as the Central Bank was forced to devalue the currency to protect dollar reserves.

According to the CBN’s external sector development report for the first quarter of 2015, of the country’s stock of external reserves, which stood at $29.36 billion at the end of March 2015, the Yuan was worth $2.21 billion or 7.5 per cent.

A falling Yuan would decrease the value of Nigerian reserves in dollars.

Devaluation of the Yuan risks a new round of competitive easing that may send Emerging Market currencies tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist, Stephen Jen .

Nigeria’s trade with China accounted for 23 percent of all foreign trade in 2014, leaving Africa’s largest economy vulnerable to a slowdown in the world’s second largest economy.

Investors worried over China’s policy and economic slowdown have sold commodities from copper to oil, on fears that the devaluation makes them more expensive and China to buy less.

Brent crude climbed 1.3 percent to $49.85 per barrel after slumping 2.4 percent on Tuesday. The benchmark for half of the world’s oil has lost 52 percent in the past 12 months.

The looming rise in US interest rates that might pull funds out of Emerging Markets is another pressure point for the naira.

“An increase in rate by the US will make Nigerian assets less attractive on risk-adjusted basis, and will trigger further exit by foreign investors,” Olutola Oni, head of research at investment firm, WSTC Financial Services Ltd, said in response to questions.

“However, we do not expect the consequence (of the increase in rates by the US Fed) on the Nigerian financial markets to be as significant as that of June 2013 when the US first announced its intention to commence the tapering of its quantitative easing.”

A day after the Chinese devaluation, the currency continued to drop on Wednesday, prompting the authorities to intervene in markets to try and stem its slide.

The Yuan tumbled 1 percent to 6.3870 per dollar as of the close in Shanghai, its biggest two-day drop since China unified official and market exchange rates in January 1994, according to Bloomberg data.

The Central Bank of Nigeria’s intervention in the currency market has helped to tame naira volatility with the currency trading steady near the N199 mark since March in the interbank market.

PATRICK ATUANYA