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Naira battling for stability after heavy loss

By on March 17, 2015

Amid continued efforts by the Central Bank of Nigeria to prop up the value of the weakening naira, the currency strengthened by 1.7 per cent against the United States’ dollar in January as it closed at 187.6 on Friday, January 30.

The strengthening was said to have been driven by strong US dollar inflows from state-owned enterprises such as the Nigerian National Petroleum Corporation in addition to CBN market intervention.

Prior to the slight improvement, there had been widespread speculation of further devaluation of the naira as the currency continued to trade outside the new official band that emerged in November last year.

The CBN, had on November 25, 2014, devalued the naira by eight per cent as it officially pegged the currency at 160-176 to the dollar, a move triggered by the plunge in global oil prices.

Signs emerged early in February that the naira might not sustain or build on its January gains. At the end of the first week of February, the naira weakened against the dollar as it closed at 194.1 amid weak oil prices and concerns over the elections.

The postponement of the general elections on February 7 fuelled further depreciation of the naira, stoking speculation that the CBN might devalue the currency again.

On February 12, the naira hit an all-time low of 206.60 against the dollar at the interbank segment of the foreign exchange market, a decline of 20 per cent since the start of November.

The further weakening of the currency was triggered by weak oil prices and escalating tension over the postponement of the elections by six weeks.

The development, which also led to further depletion of the nation’s foreign exchange reserves, forced the CBN to scrap the Retail and Wholesale Dutch Auction Systems, its bi-weekly forex auctions on February 18.

Before taking the step, the central bank had sold the US dollar outside of the RDAS and interbank market, asking banks to submit the amount of the dollar demand they required based on a selling price of N198, with bids assessed on the banks’ actual levels of client demand.

Some analysts had then described the CBN action of selling the dollar N30 above its N168 (+/-5 per cent) rate as a de facto devaluation.

While announcing the closure of the RDAS, the bank said it became imperative in order to avert the emergence of multiple exchange rate regime and preserve the country’s foreign exchange reserves. It stated that all forex demands should be channelled to the interbank market.

The CBN had significantly drawn down on the foreign reserves in a bid to support the ailing naira, but it became unsustainable to continue to do that.

The PUNCH had on February 13 reported that the bank was under intense pressure to further devalue the naira, as the foreign reserves dropped by over $1bn in 12 days.

According to data from the CBN, the reserves had fallen to $33.4bn as of February 10, compared to $34.4bn on January 27.

In all, the naira dropped by 8.3 per cent against the dollar in February, its biggest monthly decline in more than five years, worse than a 6.9 per cent fall in November after the CBN devalued the currency by eight per cent.

At the end of the month, the currency had depreciated by about 24 per cent since June last year as oil prices tumbled by over 50 per cent.

The Head, Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, in a telephone interview with our correspondent, said, “We expect the naira to remain relatively stable for now because the closure of the RDAS market has reduced speculative demand and round-tripping by participants in the market.

“The exchange rate will be market-driven, but we will not see the kind of fluctuations we saw when the RDAS was still on. The CBN has promised to supply on demand basis as long as it is genuine demand. Now, the spread between the interbank and the Bureaux de Change is not that significant and so there’s no incentive to carry out unethical activities on the naira.”

Ebo said what the CBN had done was to look at what the fair value by which investors were pricing the dollar at the interbank is, which, according to him, reflected the average fair value which investors felt they could trade the dollar.

“What the CBN has done is to devalue the naira, you can call it tacit or technical devaluation, to reflect that particular price that it has traded over a period. So, it is different from what they did in November that they just increased from 155 to 168, not necessarily reflecting the amount which it was trading at the interbank,” he said of the closure of the RDAS.

While the closure of the RDAS had been adjudged as a welcome development as it would curb further depletion of the country’s forex reserves, analysts said it did not mean that the naira’s weakness had ended.

Analysts at Ecobank’s Economics Research Desk, headed by Mr. Angus Downie, said closing the RDAS window immediately removed $600-$800m from the foreign exchange market each week, which would significantly add pressure on the naira to weaken further given strong US dollar demand.

They, however, noted that the CBN had advised that it would continue to intervene in the interbank foreign exchange market, selling the US dollar when it considered it necessary, adding that expectations by some in the market that the naira could weaken sharply appeared overblown.

“The move comes at a time of heightened currency pressures driven by the collapse in oil prices, which could undermine efforts to develop exchange rate policy and strengthen the market overall,” the Ecobank analysts said.

Although the CBN is expected to inject the US dollar when it considers it necessary, the dollar liquidity will shrink due to insufficient supply, according to the analysts.

Analysts at Renaissance Capital Limited said the devaluation would significantly lower the risk of soft capital controls and aggressive rate hikes, “but does not spell the end of naira weakness, in our view.”

They stated that the naira devaluation implied inflation would continue to accelerate in the coming months into the lower double-digits.

The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who described the RDAS closure as “pricing of the naira at fair value”, said it meant that an efficient price would emerge and speculative demand would drop off.

“They want to sell the dollar at the right price. Foreign exchange rate has been the biggest subsidy in this economy, now that subsidy is gone.

Analysts at WSTC Financial Services Limited, Olutola Oni and Motunrayo Giwa, said, “We view the decision of the apex bank to scrap the RDAS foreign exchange window as a technical way of re-pricing the value of the naira (a euphemism for devaluation), and this is expected to check the avoidable haemorrhaging of the nation’s stock of external reserves.

“We reckon that the re-pricing of the domestic currency is a necessary policy statement for restoration of stability in the financial markets.”

Weeks after the closure of the RDAS window and more than two weeks into March, the naira has not improved significantly and concerns remains about the country’s foreign reserves.

For many analysts, the fight to save the naira from weakening further is far from over

 

[Punch]