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Oil slide echoes 2008 pressure for Nigeria, Saudi to defend currency

By on November 14, 2014

The sharpest drop in oil prices since 2008, coupled with a surge in the dollar, are testing the  capacity of energy-producing nations to defend their currency pegs.
Even Saudi Arabia, whose $745 billion reserves may allow it to maintain the link for years, is feeling the pressure of speculators betting against its currency. Nigeria intervened in foreign exchange markets to bring the Naira back from a record low last week, while economists surveyed by Bloomberg expect Venezuela to capitulate on its dollar peg by year-end.

According to the Bloomberg survey, for the dwindling number of nations whose exchange rates are linked to either dollars or a basket of major currencies, breaking those ties would raise the odds of inflation accelerating too fast. It would also take away a steadying influence on their economies.

“Countries operating with a currency peg, particularly oil exporters, are suffering from losing export earnings, weakening their ability to defend the peg at a time when emerging-market currencies are under pressure from a stronger dollar,” Stuart Culverhouse, the chief economist at London-based frontier-markets specialist Exotix Ltd., said, “It magnifies the problems they’re having,” he added.

Oil and natural gas account for at least 85 per cent of the exports of Saudi Arabia, Nigeria and Venezuela, while Russian energy sales account for more than half the government’s revenue, according to the U.S. Energy Information Administration.

Though it didn’t have a formal peg, Russia, the world’s largest energy exporter, this week, ended a policy of maintaining the ruble in a fixed band versus a basket of dollars and euros.

Crude oil fell almost 30 per cent since mid-June to a three-year low of $75.84 per barrel last week, according to generic prices in New York compiled by Bloomberg.

At the same time, the dollar is soaring on the prospect of higher US interest rates. Bloomberg’s Dollar Spot Index, which tracks the greenback against 10 major peers, rose 9 per cent since June to a five and half-year high of 1,099.28 on November 7.
Nigeria may need to devalue the Naira after presidential elections in February,
Goldman Sachs Group Incorporated  said in a  report, adding that policy makers target a rate for the Naira at twice-weekly auctions of 155 Naira per dollar, plus or minus 3 per cent.

In defending the fixed-exchange rate, Africa’s largest oil producer has reduced its foreign-currency reserves to a four-month low of $37.9 billion, with the naira weakened to a record 172.78 Naira per dollar on November 7, before intervention helped it rebound. Even so, it has fallen for the past three days on concern Nigeria’s central bank will no longer be able to defend the peg, and was at 169.25 as of 10:55 a.m yesterday in London.

Those concerns led Phillip Blackwood, a money manager at EM Quest Capital LLP in London, to sell his holdings of Nigerian domestic bonds in recent weeks.

“There’s so much pressure,” Blackwood, who manages $3.3 billion of emerging-market assets, said by phone on November  7. “They’re not willing to defend. It costs too much.”

Ibrahim Mu’azu, a spokesman for Nigeria’s central bank in Abuja, said last week that no decision has been taken on whether to devalue. So-called 12-month non-deliverable forwards on the Naira weakened to a record 199.50 per dollar on November 10, and were at 197.50 yesterday, suggesting traders expect the currency to decline about 17 per cent in that period.

With the world’s third-largest foreign reserves after China and Japan, Saudi Arabia is more than capable of defending the 3.75-per-dollar peg that has existed since the 1980s, as are other energy exporters in the region, said Jason Tuvey, an economist at Capital Economics Limited in London.

That hasn’t stopped traders from testing the central bank’s resolve. The riyal fell to 3.7536 per dollar on October 21, the weakest level since 2009, before rebounding to 3.7519 yesterday.

Implied one-year volatility, which reflects bets on future price swings, jumped to a three and half-year high of 0.81 per cent  last month, and have since eased to 0.7, as the data compiled by Bloomberg show. That’s still almost double the 0.38-per cent average since the end of 2011.

The Saudi Arabian Monetary Agency in Riyadh didn’t immediately respond to questions sent by e-mail and fax outside office hours yesterday.

Mideast nations have “enormous currency reserves that certainly provide plenty of buffer, even if oil prices fall further,” Tuvey said on November 7. “I don’t think there’s any particular pressure on their dollar pegs.”

Currency pegs haven’t been under such pressure since the global financial crisis of 2008, when oil prices plunged more than 75 per cent in the second half of that year and the dollar surged as investors sought safe assets.

 

[This Day]