The 30 percent drop in Brent oil prices on Monday to $30 a barrel holds high risk for Nigeria’s economy and even worse for the country’s local currency which the Central bank has been stabilising through its interventions.
Saudi Arabia’s sudden oil price war in response to Russia’s hard ball over production cuts holds risk for possible naira devaluation, and thus saving in foreign currency like the US dollar may hold investment opportunity for Nigerians and investors, industry sources have warned.
Nigerians who currently save in US dollar or have domiciliary account could reap huge profit when the foreign currency becomes scarce or when the value of naira depreciates, projections by BusinesssDay shows.
Needed for import transactions, the US dollar is usually sorted after by Nigerian importers and it is also in high demanded by Nigerians who travel abroad for educational and health tourism.
But the plunging price of crude oil, the product where Nigeria gets 85 of its foreign earnings from could put the country at risk of a dollar supply shortage. According to industry sources, it will be a big opportunity for those who are able to secure enough dollar while it is available.
I think this has become a go-to option for many investors particularly retail investors since last year, Ayorinde Akinloye, a consumer goods analyst at Lagos-based CSL Stockbrokers said.
According to him a lot of industry players are expecting the naira to weaken later in the year, and “many investors consider the dollar savings a good option,” Akinloye told BusinessDay.
With increasing exposure to external vulnerabilities, Nigeria is at risk of a higher current account deficit and declining reserves which has remained highly defenceless to capital flow reversals.
For an oil-dependent nation like Nigeria, plunging oil price fuelled by the Coronavirus outbreak which has led to the price war could mean additional shock for Africa’s most populous nation as the decline in global oil demand and the consequent fall in prices may throw the naira off balance.
To defend the naira and keep it stable against the US dollar the Central bank has continued to intervene in the FX market but the increased dollar sales by the apex bank in the face of high demand by foreign portfolio investors exiting the nation’s fixed income market has been the key culprit responsible for the country’s continued decline in external reserves.
While the apex bank has assured that it is unlikely it will devalue the naira in 2020, industry analysts believe that the regulator may be forced to leave the market to determine the exchange rate when it reserves get some more heat from the declining oil price.
The reserve which has maintained downward trend in the last eight months worsened by a 49 percent decline from $37.73 billion the week earlier to N37.23 billion as of 13th February 2020, data by the Central Bank show.
The Central Bank could devalue the Naira between 5-10 percent in 2020, analysts at EFG Hermes have said. Nigeria’s exchange rate between the naira and the dollar has remained flat at about N360-N363 at the Investor and Exporter window following staunch defence by the apex bank.
While querying whether the CBN was cooking a mini devaluation, analysts at EFG Hermes posited that the apex bank could be forced to devalue the naira later in the year 2020
“A self-driven devaluation would be a precedent in Frontier markets, as usually central banks are forced to devalue rather than seek it,” they said.
With two currency devaluation under his belt, the current Central Bank Governor, Godwin Emefiele is prepared to fight off naira depreciation even though it may be doing that at a high cost.
According to the Milk Index report by the Rand Merchant Bank (RMB), a South Africa-based investment bank, the naira has one of the highest levels of discrepancy among the eight currencies that were analysed in Africa.
The currency of Africa’s largest economy was estimated to be overvalued by over 160 percent fuelled by the country’s rate cut and portfolio outflow.
“RMB saw some weakness in the naira driven by the exit of offshore investors and the rate cut by CBN,” Neville Mandimika, SSA Economist and Fixed Income Analyst at Rand Merchant Bank said in 2019.
A currency is overvalued if the value on the exchange market is higher than is believed to be sustainable. This may be due to a pegged or managed rate that is above the market-clearing rate, or, under a floating rate, it may be due to speculative capital inflow.
If the naira is devalued later this year or allowed to be determined by market forces, an investor that obtained the US dollar at the current exchange rate can get as high as percent return when the dollar becomes scarce, as compiled from BusinessDay estimates.
Battered by the global drop in crude price to $50 per barrel from around $100 two year earlier, Nigeria devalued its naira in 2016, and from a peg of N197/$ before the devaluation, exchange rate in the country hit the roof at N500/$ fueled by the excess demand from Nigerians who were in search for dollar to meet their personal, business travel, medical, and school fees needs.
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