CBN devalues naira as oil concerns drive currency slide

MONETARY TIGHENING Banking watchdog should introduce 10% devaluation and lift interest rates 2% points to boost naira

Nigeria’s currency, the naira slid as much as 1.9 per cent to a record low of N177.25 per US dollar yesterday at the interbank market ahead of a crucial Monetary Policy Meeting (MPC) next week, where the onus is on policy makers to come up with something decisive to quell rising concerns of a devaluation.

The naira also depreciated at the official window (Retail Dutch Auction Market) moderated by the Central Bank of Nigeria (CBN) to close at a new low, culminating in a drop 1.25 percent despite intervention by apex bank.

The banking watchdog unexpectedly sold dollars at N158.41 naira at the window, having earlier auctioned the greenback at 156.59 naira, unnerving dealers worried about the risk of a possible devaluation. That left dollar orders unfilled from importers who had placed exchange rate limits on their transactions, boosting demand on the interbank market.

The fall in the currency accelerated the rate of sell-off in the stock market, which fell as much as 3.8 per cent to a one and a half year low before paring its decline to 2.1 per cent yesterday as foreign investors who have pulled out more than N670 billion in the first 10 months of the year continued to sell equities.

                    

Dealers said the central bank stepped up interbank dollar sales, selling close to $250 million, which failed to quench demand for dollars, mostly from importers. Nigeria imports around 80 percent of what it consumes but production has stagnated even as rival supplies have climbed.

Nigerian markets have come under intense pressure this month. Investors are increasingly concerned at the swelling Boko Haram Islamist insurgency in the predominantly Muslim north, but the biggest factor has been the slide in oil prices.

This summer the US failed to import crude from Nigeria for the first time since records began in 1973, according to a report by Deutsche Bank this week. Unlike some other big producers, Nigeria was “badly prepared for declining oil revenues”, wrote Oliver Masetti, an analyst at Deutsche Bank. “Despite elevated oil prices over the last few years, the country did not build strong fiscal and external buffers.”

The CBN has periodically intervened in the currency market during the past two weeks to prevent the weakness from deepening into a rout, but so far with little success and at the cost of depleting its financial backstop. Foreign currency reserves slipped to just $37.54 billion at Nov. 14, with further declines expected this week.

Local and international analysts are speculating that Nigeria will eventually be forced to devalue, and non-deliverable forwards – contracts that allow investors to bet on future currency movements – imply that fund managers expect the currency to fall to N201.50 to the dollar in 12 months. Continue after the cut...

The banking watchdog is meeting on November 24-25, and Stuart Culverhouse, chief economist at Exotix, said it was time for a “strong response” from policy makers to steady Nigeria’s financial markets.

“The pressure on the naira poses a significant problem for policy makers, and the timing, ahead of February’s presidential election, could not be worse,” he wrote in a report.