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As Naira regains stability, experts fear slide may continue

By on February 22, 2015

The Naira friday regained some of its footing after an indirect devaluation in the official exchange rate versus the dollar on Wednesday by the Central Bank of Nigeria. But analysts reckon that pressures against the naira will continue to mount in 2015.

The Naira recovered to trade at 198.8 per dollar yesterday in the Inter-bank Market, from a peak of NGN206.3 earlier this month. Nonetheless, the devaluation does not mean the end of Nigeria’s currency weakness, predicts Yvonne Mhango of Renaissance Capital.

The CBN on Wednesday scrapped its bi-weekly auction of foreign exchange and in effect dropped its official exchange rate band of 5 per cent around the NGN168 per dollar fixing.

From now on, the central bank will sell dollars at NGN198 which in practice, amounts to another devaluation after last year’s move from NGN155 per dollar to NGN168 per dollar.

The move was forced as the naira’s continuing slide had depleted the central bank’s gross reserves to a three and a half year low of just $32.4bn.

“We think the deterioration in Nigeria’s external balances, on the back of lower oil prices, implies that the naira will continue to weaken in the short term. We forecast a current account (C/A) deficit of 3.9% of GDP, assuming a $60/bl oil price in 2015E. This following 12 years of C/A surpluses. We acknowledge that there is upside risk to our C/A deficit projection, particularly given the significant devaluation of the naira over the past six months, which should translate into a pronounced import adjustment. We still see the naira weakening to c. NGN220/$1, in the short term,” Mhango told Financial Times of London.

Stuart Culverhouse, chief economist at Exotix, agrees. He still predicts that the naira will weaken to 220-230 by the end of the year, despite the authorities’ reluctance to countenance an exchange rate starting with “2”.

“The changes may help to stabilise the naira in the near-term and should ease pressure on reserves. A smooth election would also help reduce some of the FX premium,” said Culverhouse.

“However, we expect that the balance of payments will continue to remain under pressure and without a more timely, coordinated and credible policy response, further adjustments in the exchange rate look likely. NDF rates have widened slightly this morning, reversing yesterday’s narrowing. Three month NDF rates are NGN/US$226 and twelve month rates at NGN/US$275,” reports Bloomberg.

 

[ThisDay]