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Depletion of foreign reserves increases pressure on naira

By BusinessNews Staff on March 3, 2014

As the nation’s foreign reserves fell to $40.406 billion last Thursday, economic affairs commentators warned at the weekend that Nigeria is getting to a stage when it may have to make a choice between a depleted foreign reserves buffer and a strong naira on one hand, and between accretion to foreign reserves and a devalued local currency.
The downward trend in the foreign reserves, according to financial analysts, is likely to trigger panic amongst jittery investors.
Although the acting Governor of the CBN, Dr Sarah Alade, was quoted as saying that naira devaluation was not in the front burner for now, Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said it was only a matter of time before the CBN loses the currency war and allows the naira to weaken.

Rewane said in a report last week that, “Given the high sensitivity of the Nigerian economy to exchange rates, the acting governor, Sarah Alade, has reiterated that she will pursue the monetary policy bias and stance of Sanusi, at what cost? However, in order to achieve a feat that is gradually becoming insurmountable, the CBN will have to haemorrhage its external reserves level. Nigeria’s external reserves, currently at $41.05billion, (as at a fortnight ago) have depleted 5.87% YTD and 15.98% compared to 2013’s peak of $48.86billion. It is only a matter of time before the CBN loses the currency war and allows the naira to weaken.
“At what level is the CBN willing to sacrifice its external buffers and by how much will the naira weaken?” Rewane said answers to these questions will be provided as events unfold.
According to a document authored by the nation’s Economist Intelligence Unit on the direction of the naira, the local currency has exhibited significant volatility on interbank markets since the suspension on February 20 of the CBN Governor, Lamido Sanusi, by President Goodluck Jonathan.

This, the Intelligence Unit believed has prompted speculation as to the fate of the naira’s loose peg to the US dollar, a policy which Sanusi had been a keen exponent of.
Before Sanusi’s suspension announcement in the morning of February 20, the naira had been trading at around N163:$1, but the announcement saw a spike to N169:$1, before trading on local currency and capital markets was suspended.
A study conducted by the Economic Intelligence Unit showed that when markets reopened on February 21, the naira recovered to around N166:$1 with the CBN selling dollars. The CBN has long managed the naira within a target band against the US dollar, as a hedge against inflation but also because senior policymakers have historically viewed a strong currency as a source of national pride.
Last Wednesday, CBN offered $400million at RDAS auction and sold $398.8million at 155.75 – effectively 157.30 when the statutory 1 per cent commission is factored in. Interbank forex market opened at N164.50 and closed at N164.90. When intra-day rate peaked at N165 levels, CBN breezed into the market to bring it down to N164.50.

CBN is believed to have intervened in reaction to Bank of America’s report, quoted in media last week, downgrading naira-linked instruments on fears of further erosion in Nigeria’s external reserves, which dropped below the psychological resistance level of $41bn to $40.60bn on Wednesday. This did not prevent the naira from losing N0.40 within the last five minutes of trading to close at 164.90. The last minute rate move was widely seen as speculative. Surprisingly the story was the opposite in the parallel market where the naira firmed up by N0.50 from 172 to 171.50.
In terms of interventions at the RDAS, the apex bank has been consistent in meeting the rising demand especially in the month of February.
Despite the assurance from the Coordinating Minister of the Economy and Finance Minister, Dr. Ngozi Okonjo-Iweala that the CBN would not divert from policies aimed at helping the naira to stabilise, Rewane said that, “whereas short-term currency stability seems likely to return, we have more serious doubts about the naira’s medium term prospects.
Rewane said, “The CBN does allow periodic adjustments to avoid any rapid running-down of foreign reserves, a move that seems increasingly likely later in 2014 or 2015. The last such adjustment took place in 2011 when the marker was shifted slightly from N150:$1 to N155:$1. Larger revaluations were carried out at the height of the global financial crisis in 2008 09, when the naira target was moved from N120:$1 to N150:$1. Although the 2011 devaluation helped Nigeria’s reserves to recover over the next year, they fell from $48billionn in the first quarter of 2013 to $43billion in January 2014.

“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 underperform 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.”
The FDC boss believe that Nigeria’s position as a key frontier market is set to wane over the next 18 months. “
According to the Director Equities/African Equity Product Distribution, Renaissance Capital Limited, Daniel Ugwuoke, Dealers believe CBN may move the mid-point of the currency rate higher at the next MPC coming up on March 24-25 and further increase CRR to protect the reserve and possibly attract further foreign portfolio investment flows.
“However, oil theft and theft of oil money must abate, while reserves must accrete for these to be achieved on a sustainable basis,” he said, adding that most dealers agreed with Bismarck Rewane’s view that once the reserves go below $40billion, all bets will be off – making devaluation potentially unavoidable.

According to the Director Equities/African Equity Product Distribution, Renaissance Capital Limited, Daniel Ugwuoke, Dealers believe CBN may move the mid-point of the currency rate higher at the next MPC coming up on March 24-25 and further increase CRR to protect the reserve and possibly attract further foreign portfolio investment flows. “However, oil theft and theft of oil money must abate, while reserves must accrete for these to be achieved on a sustainable basis,” he said, adding that most dealers agreed with Bismarck Rewane’s view that once the reserves go below $40bn, all bets will be off – making devaluation potentially unavoidable.

[This Day]

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