Paul Wallace and Emele Onu London
THE NAIRA’S plunge to a record low shows that a bear market in oil is overwhelming attempts by Nigeria’s central bank to shore up the currency with higher interest rates and stiffer reserve requirements.
The currency of Africa’s largest economy weakened 7.2 percent this quarter. On Tuesday, the naira dropped the most since December 2011 to close at a record low of 177.30 (R10.91) in the interbank market. The decline came as oil, which accounts for 70 percent of government revenue, extended its drop since June to 29 percent.
The rout in crude overshadowed central bank chief Godwin Emefiele’s move on Tuesday to raise the key lending rate by 1 percentage point to a record 13 percent, the first increase in three years.
To curb naira liquidity, which puts downward pressure on the currency, the central bank raised the cash-reserve requirement for private sector deposits at commercial banks to 20 percent from 15 percent.
“There are still risks around oil prices,” Ridle Markus at Barclays Africa Group said. “It could get worse for them.”
The central bank changed the peg used to buy naira at foreign exchange auctions to 168 a dollar from 155 on Tuesday, effectively acknowledging that it is on a weakening trajectory.
The trading band was widened to 5 percent above or below the peg, from 3 percent, in a bid to bring it closer to the interbank rate. The currency gained 0.5 percent to 176.47 a dollar at 10.57am in Lagos.
The central bank’s moves will not be enough to entice many foreign investors to buy naira bonds, according to Phillip Blackwood, a London-based money manager at EM Quest Capital. Local currency bonds lost 8.3 percent this month, the most on a dollar basis among 31 emerging markets tracked by Bloomberg indexes.
“The pressure on the naira will continue,” said Blackwood, who advises Sydbank, a Danish bank, on $3.3 billion (R36.3bn) of fixed income assets in developing countries. Sydbank sold its naira bonds in October and early this month because lower oil prices were weakening the currency, Blackwood said.
“The best thing to do would be to depreciate more than they’ve done. You have to start looking at levels of 190 or 200 in the interbank market before it makes sense.”
Nigeria’s foreign reserves dropped to a five-month low of $37bn on Monday, down 15 percent this year, after the central bank tried to bolster the naira.
Tuesday’s tightening would not stop policymakers from having to intervene in the foreign exchange market, Pabina Yinkere, the head of research at Lagos-based Vetiva Capital Management, said.
“We don’t expect the measures to impact the currency immediately because of the high level of dollar demand and the outlook for the oil sector,” Yinkere said. “The central bank has to continue its interventions to be able to sustain the currency.”
Increased government spending before elections in February and tighter monetary policy in the US, which could lead to outflows from emerging markets, will probably prompt Nigeria’s central bank to raise rates again next year, according to Jack Allen at Capital Economics in London. The “decision is encouraging”, he said on Tuesday. “But it might not be enough.” – Bloomberg