CBN Governor, Sanusi Lamido Sanusi


The downward trend in the value of the naira came to a temporary halt last week as the Central Bank of Nigeria (CBN) increased its offering at the official exchange market in addition to the flow of dollars from the Nigerian National Petroleum Corporation (NNPC). However, analysts have warned that the volatility in the oil market and the activities of currency speculators could complicate the CBN’s rescue plan for the naira, reports Festus Akanbi

Money market operators last week heaved a sigh of relief when the naira rate recorded a marginal improvement in exchange for the dollar following the injection of about $400 million by the Central Bank of Nigeria (CBN) through the Dutch auction last Monday. The regulator sells the US currency at auctions and direct to lenders at interbank trading to stabilise the naira. Although the apex bank has consistently allayed the fear of market operators over the rising demand for the dollar and the attendant pressure on the naira, money market watchers described last week’s improvement in the naira value as momentary in view of the unfolding scenario in the global economy.

Last Monday, the naira rose to its highest level in three weeks against the US dollar at the interbank market after the intervention of the CBN and the speculation of a planned dollar sale by the Nigerian National Petroleum Corporation (NNPC). The naira closed at 161.45 to the dollar on the interbank market, the level last seen on June 4, and firmer than the 163.25 a dollar it closed a fortnight ago.

The central bank sold $400 million at a foreign-currency auction on June 18 and same amount earlier on June 13, the most since February 8. Nigeria’s external reserves put at $37.46 billion as at Tuesday have remained robust given the fact that the level of reserves could cover an import bill of over 11months. However, economists warned that the global oil price, in conjunction with output volatility, would have a significant impact on the growth trend of the nation’s reserves. They maintained that a continued drop in oil prices could precipitate further pressure on the exchange rate, which would ultimately affect external reserves, as the CBN may have to intensify its use of forex reserves to ensure currency stability.

Weak Naira
The Nigerian currency has consistently weakened against the dollar in the last two months on the back of strong dollar demand, declining supply from multinational oil companies and mass exit of the local debt market by offshore investors fleeing to safe havens because of the Eurozone debt crisis. For instance, in the official market and in the week which ended June 16, the naira traded at N163.5 to the dollar, a swift movement from N158.95 to the dollar a week earlier.

There was renewed volatility in the exchange rate in May as the naira weakened by 0.04% to N155.75/$1 at the Dutch auction. The depreciation was the result of a 58.82% increase in the effective demand for dollars; which was reflected in the total forex auction sale of $1.62 billion in May, as against $1.02 billion in April. At the interbank, the naira lost 3.04% against the dollar (from N157.39/$1 to N162.18/$1 as at May 31). A report by the financial derivative company last week said the parallel market was no different as the naira fell from N159/$1(May 2) to N162/$1 (May 31); a 1.89% depreciation. Other commentators on the Nigerian economy said the current bashing of the naira could be blamed on the volatility in the global oil market which has automatically reduced the flow of dollars to the economy.

For instance, oil price was divided on Thursday to $79 per barrel as against $123 sold in March, a development attributed for the ascendancy of currency speculators in the recent time.

Currency Speculators on the Prowl
The activities of the currency speculators are said to have started taking its toll on the foreign exchange market with the rising demand for the dollars and the need for the apex bank to rely on the foreign reserves in order to be able to pump more green backs into the system. But experts warned that although the regulatory authorities have been able to bring stability into the foreign exchange market by dipping their hands in the foreign reserves, the relief may be short-lived unless the situation in the oil market improves fast.

According to FDC, “Global oil prices are dropping while Nigeria’s external reserves remain robust. The question, however, is how vulnerable are Nigeria’s external reserves, should oil prices drop further, for example, to a low of $80pb? “The federal government’s budget is bench-marked to oil price at $72pb, while Bonny Light crude is trading at $98pb. This is a variance of $26pb. Using our regression model, at the current rate of decline, we expect foreign exchange (forex) inflows to fall from $4.31 billion in January to $3.34 billion in July. If oil prices were to drop to $80pb (which is 50% likelihood based on current trends), there is a 95% likelihood that forex inflows will decline to approximately $3.03 billion. In this situation Nigeria’s external reserves would be expected to follow suit and drop to a value as low as $22 billion, covering less than three months of imports. Resultantly, the CBN may be forced to allow the naira to depreciate sharply to N165/$1, to compensate for the substantial loss in oil revenue.”

The financial advisory firm argued that if the weakening in the naira persists, then the nation’s forex reserves could deplete even faster than the CBN anticipates, explaining that the market would likely see such depletion as a sign of weakness which could lead to a further increase in currency speculation.

FDC also corroborated the position of market operators who blame the activities of speculators for the rise in demand for the dollar and the corresponding decline in the value of the naira.

The company noted that speculators were besieging the market to take positions, due to their expectation of a weaker currency as a result of the declining trend in oil prices; i.e. lower oil prices will result in a slowdown in external reserves accretion and the ability of the CBN to continue its support of the naira. Another group of people whose activities are said to be affecting the currency market is the one made up of multinationals that have declared dividends and have increased their demand for forex for the purpose of repatriating earnings. FDC also attributed the current scenario to the issue of round-tripping between the official and parallel markets.

“The spread between parallel and official rates has widened to levels last seen in December 2009 and early January 2010. The gap between the official spot rate and the parallel cash rate is currently N9.1, from a low of N2.94 in March,” the company said in its report.
But the CBN is insisting that the situation at the currency market is under control, ruling out the need for speculative foreign exchange buying because of the depreciation in the value of naira.

CBN’s Deputy Governor, Economic Policy, Sarah Alade, who reacted to the instability in the nation’s foreign exchange market last week said: “I want to assure you, just like the governor had done during the monetary policy communiqué that we know the exact amount of inflow, foreign monies that come in, and were they to go out, we are in the position to know.

``With reserves of about 37.5 billion dollars, we have built up reserves and we have the strength, we have the muscle to be able to have the capacity to meet the demand. ``That’s why we are assuring some group of the market that there is no need for speculative buying,’’
Alade said that there was nothing to panic about even with the downward fall in the price of oil in the international market as the apex bank had continued to monitor development.

She assured that the apex bank would continue to meet genuine demands and that there was no need to worry.
Reacting to the developments in the foreign exchange market, Managing Director, Resources and Trust Company Limited, Mr. Opeyemi Agbaje, said it was too early to heave a sigh of relief giving the over-reliance of the nation’s economy on oil revenue.

“Our exchange rate is almost completely dependent on oil prices and our production volumes (the other variable) is the level of spending which tends to be inelastic,” he said.
In spite of the assurance given by the apex bank, Agbaje said there is cause for worry because it is easy for all the players in the economy to determine the direction of the naira exchange rates.

He explained, “The reason for the surge in the demand for foreign exchange is that the market knows that if the oil price downward volatility persists, something (reserves and exchange rate) will have to give sooner or later. People are rushing to get cheap dollars before they become expensive.”

However, Head of Macroeconomic at the London office of Standard Chartered Bank, Riza Khan had a different view.
According to her, “The situation is meaningfully different from the one in place when the NGN previously came under speculative attack. “Although there had been some evidence initially of foreign investors liquidating their NGN longs, and repatriating capital ahead of the Greek elections, this was not the primary driver of the FX rate.” Khan described the current scenario as domestic speculation.

“Some have even suggested (given that the economy is slowing, and the additional demand cannot be explained by imports alone) that either import demand is being brought forward, or that companies are borrowing in order to buy FX.

If the latter, the terms on which companies can borrow will be important.  The carry on NGN assets is positive.  If different entities are borrowing to fund their FX purchases, and the FX rate does not decline enough to compensate them for their cost of borrowing, then they will ultimately be losing out.  It isn’t cheap to borrow in NGN to fund FX purchases, unless they somehow have access to concessional financing.

Provided oil prices do not collapse therefore, we think reserves accumulation will be sufficient to keep the peg going.  Given Nigeria’s great dependence on oil however, if we were to see a meaningful correction in earnings (either due to the price or output effect) then questions about the sustainability of the naira’s soft peg would become more pronounced,” she submitted.