The pressure on the naira heightened yesterday after reports that Bank of America suddenly downgraded naira-linked instruments on fears of further value hemorrhage in the market.
The downgrade followed the fall in Nigeria’s external reserves below the psychological resistance level of $41 billion yesterday ebbing to $40.6 billion (seven months imports) because of the frequent requirement to resort to the once healthy reserves to defend the national currency.
The external reserve level is now about 17 percent lower than 2013 peak of $48.86 billion and 6.67 percent below December’s level of $43.6 billion.
The Bank of America says whereas there might be the political will to continue to defend the naira, the running down of the reserves remained a constraining factor and then went on to recommend underweight position, forecasting a further weakening of the national currency to N170 in 2014.
The naira value fell to N172 to the dollar yesterday on the parallel market and closed N164.46 on the inter-bank market, losing 0.81 percent despite Shell selling an undisclosed sum, while ExxonMobil sold $50 million and Addax selling $8 million.
The fall in the value of the naira left some analysts saying a devaluation of the currency is now a matter of when and not if.
Leading economist, Bismarck Rewane, said last night, “Once we go below $40 billion in reserves, all bets will be off and then you have a real crisis.”
According to the Economic Intelligence Unit (EIU), “Whereas the short term currency stability seems likely to return, we have more serious doubts about the naira’s medium-term prospects.”
Added the EIU, “The economy and with it confidence in the currency, has been adversely affected by lower oil prices, faltering oil production and political uncertainty. We expect the oil sector to continue to under perform both this year and next.
Meanwhile, political uncertainty, having been exacerbated by the upheaval at the CBN, will continue to increase ahead of the 2015 elections. On top of this will be the effect of the US tapering of its monetary stimulus. Portfolio investment inflows surged into Nigeria during 2011-2012 and much of 2013, but will fall significantly in 2014-15, both owing to investor concern about events in Nigeria and as investment flows back towards developed markets.”
Financial markets were thrown into a spin last Thursday when it emerged that President Goodluck Jonathan had forced out CBN Governor Sanusi Lamido Sanusi in a move many linked to claims of missing oil revenues although this was denied by the government.
However, the pressure on the naira which predated the ouster of Sanusi has not abated despite assurances from acting CBN Governor Sarah Alade that the apex bank will not abandon the stout defence of the national currency which had been associated with the Sanusi era.
On Friday, the CBN intervened to bolster the naira but with many betting on the likelihood that the apex bank will be forced to adjust its naira rate band, the naira continues to fall under speculative pressures.
The CBN sold $399.73 million on Monday but this has not brought the much-needed respite for the naira because negative market sentiment continues to spur dollar demand pressure as the external reserve jitters continue.