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Experts foresee pressure on naira over declining crude oil prices

By BusinessNews Staff on October 23, 2014

The declining crude oil prices, which have continued to cause apprehension across the global market may put pressure on the ability of the Central Bank of Nigeria (CBN) to intervene in the forex market.
The global crude oil prices, which was relatively stable for nearly four years has been on a decline in the past few weeks and this may hurt the country’s external reserves and revenue.
A Lagos-based investment company, WSTC Financial Services Limited, in its latest economic report obtained on Monday, pointed out: “Falling crude prices constrain CBN intervention. In order to stem leakages and to minimise exchange rate volatility, the CBN authorised a mandatory recapitalisation of firms operating in the bureau de change (BDC) segment of the forex market with an upward review of the minimum capital requirement for operation in the segment from N10 million to N35 million and also with the cautionary deposit of N3 million reviewed to N35 million.
“This has subsequently contributed to the narrow spread between exchange rates in the bureau de change market and other segments of the Nigerian forex market.”
However, WSTC anticipated that the continuous intervention by the CBN would be constrained by the slowdown in the rate of accretion to the nation’s foreign reserves.
The anticipated slowdown foreign reserves accretion was based on its outlook of weak oil earnings resulting from falling crude oil prices and sub-optimum level of domestic oil production.
The report also projected that the naira would depreciate this quarter.
It added: “Also, given the prevalence of domestic uncertainties, weak economic fundamentals and impending increase in interest rates in the US on the horizon, we do not expect the downward pressure on the naira to subside within the fourth quarter of 2014.
“Consequently, we envisage a slide in the value of the naira as we approach the 2015 general elections.”
However, it maintained that the Nigerian economy has remained resilient to tight monetary policy, despite national security challenges and sluggish global recovery.
The Nigerian economy expanded by 6.5 per cent in the second quarter 2014 on the back of solid growth in both the oil and non-oil sectors.
“While we expect domestic growth to remain robust in second half of 2014, we believe that the performance of the oil sector will be dampened by dwindling international oil prices and weaker-than-projected domestic crude production,” it added.
The equities market ended third quarter 2014 amid weak corporate performance, lingering security crisis and tighter global liquidity. Also, yields leapt northwards during the third quarter in the fixed income market on the back of rising country risk.
“Overall, we reckon that tight domestic liquidity measures, weak government earnings, rising political tensions ahead of the 2015 general elections and impending normalisation of rates in the US portend downside risks to the performance of financial markets in Q4 2014,” it added.

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