The risk of currency depreciation has been the biggest worry for private equity investors in Nigeria since 2014 and it’s no different this year.
The naira has shed more than 70 percent since 2014 and that has been a nightmare for several private equity investors who manage dollar funds.
But private equity investors are being proactive and finding ways to hedge against any new potential naira depreciation.
“With Coronavirus, we forecast oil prices could go as low as $40 per barrel so we are preparing for a world in which there could be a devaluation,” said Gbenga Adetoro, a partner at Africa Capital Alliance.
“We took hard lessons from 2008 and 2014; so in our plans with our companies, there’s a devaluation built in this year,” Adetoro, who spoke at a private equity event organised by the Private Equity and Venture Capital Association (PEVCA) and Rand Merchant Bank, said.
Adetoro will prefer a gradual decline rather than the CBN’s dogged pursuit of a stable exchange rate that didn’t end well in 2016.
Danladi Verheijen, CEO of Verod Capital, is ensuring his private equity firm is buying companies at discounted value to minimise the impact of an exchange rate depreciation.
“We are focused on great investments, not buying great businesses so that we are less impacted by devaluation,” Verheijen said. “The last transaction we closed is one where every product is exported which also helps minimise the risk of currency devaluation.”
Africa’s largest oil producer relies on crude oil exports to keep its currency stable but volatile oil prices have left the naira vulnerable to shocks from the oil market.
Although the exchange rate has managed to stay largely stable in the last two years, thanks to the Central Bank’s interventions, there’s a new threat to oil prices in coronavirus.
The first case of the pneumonia-like coronavirus was reported on December 30,2019 in Wuhan, the capital of China’s Hubei province.
As of 10 a.m. Central European Time on 5 February, 25 countries have reported confirmed cases of the novel coronavirus, including China, where 24,363 people had contracted the virus, or over 99 percent of all cases, according to information on WHO website. In all other countries, 191 cases of the virus have been reported.
For oil markets, it has had a troubling effect. Oil prices have fallen to their lowest in more than a year as the virus spread to 20 other countries, and the impact may worsen.
Oil analysts say oil prices could go to $40 per barrel and that brings a world of trouble for the naira which the CBN has kept stable using the petrodollars from oil exports.
The CBN has said in the past that it will remain committed to defending the naira, but that was before the coronavirus threat.
Many forecasts point to a slight depreciation in the naira this year and private equity investors are wasting no time to create buffers to avoid a repeat of the crisis in 2016.
The steady decline in external reserves since the start of the year coupled with a widening current account deficit have been a source of worry for investors, even though it has helped mask the health of the naira which has shed less than 1 percent in that period at the investors and exporters window.
LOLADE AKINMURELE
