• Wednesday, May 29, 2024
businessday logo

BusinessDay

This chart shows Nigeria’s naira is most overvalued oil currency

Naira maintains stability at N460 as CBN reschedules MPC

The Nigerian naira is the most overvalued among currencies of oil exporting countries, according to Bloomberg estimates of its real effective exchange rate (REER), further exposing the unlikelihood that Nigeria can avoid a devaluation.

The real effective exchange rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.

The chart compares the naira to oil currencies from the Colombian Peso to the Kuwaiti Dinar.

A score above 100 means the currency is overvalued, with the naira leading the pack with a score of around 130.

That’s even more overvalued than the Saudi Arabian Riyal, despite the oil giant having more favourable conditions to maintain an overvalued currency than Nigeria.

Saudi has $500 billion in its external reserves, almost 14 times more than what Nigeria has, and its breakeven oil price is in single digits compared to Nigeria’s double digits, which means it can cope better in a world of depressed oil prices than most countries.

Investors say Nigeria is ill-equipped to carry on with an over valued currency at a time when oil prices have tumbled and racing towards $20 per barrel as fears of a global recession over the Coronavirus pandemic envelopes the market.

Brent crude, the international benchmark, touched $28 per barrel as at 8:23 am Wednesday, according to Bloomberg data.

A sustained naira defence is also complicated by the nation’s fast depleting external reserves which at $36 billion is down more than 20 percent from its last peak.

“The fundamentals are not on the side of the naira and it’s as simple as that,” one money manager said.

The CBN has a contrary view, saying last week that “market fundamentals do not support a naira devaluation at this time.”