Nigeria Seen Unable to Avert Naira Devaluation Past 2021

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Dwindling reserves and lower oil prices will probably force the Nigerian central bank to devalue one of the world’s most stable currencies by next year, according to a Bloomberg survey of investors and analysts.

Ten out of 19 respondents expect the naira to be weakened in 2021, while five predict a mark-down as early as the second half of this year. The remainder believe the central bank will keep a firm grip on the currency until 2022 or 2023.

The central bank has restricted importers’ access to dollars and stepped up the sale of high-yielding debt to attract inflows from portfolio investors. It’s also backed the government’s closure of some land borders, designed to stop smuggling of food and other foreign goods.

President Muhammadu Buhari has made currency stability a key pillar of his plan to revive an economy still reeling from the collapse of oil prices in 2014. The former general has previously said that weakening the naira would stoke inflation, which already stands at a 20-month high of 12%.

When Will a Naira Devaluation Happen?
Most respondents say Nigeria can’t hold out beyond 2021

Source: Bloomberg survey of 19 investors and analysts

All but four of the survey participants said the naira is more than 10% overvalued against the dollar. Two respondents said it was at least 20% too strong.

The currency has traded around 360-365 per dollar since its last devaluation in 2017. While the central bank says the exchange rate is determined by the market, it is much less volatile than other oil currencies such as the Russian ruble and Kazakh tenge. A fall of 10% would take the naira to about 400, while a 20% drop would see it at 450.

How Overvalued is the Naira Against the Dollar?
Most respondents say it’s at least 10% too strong

Source: Bloomberg survey of 19 investors and analysts

The respondents were evenly split on the size of the devaluation, with nine predicting the naira will drop 10% or less and the same number saying it would be marked down by 10% to 20%. Only one forecasted a fall of more than 20%.

Most survey participants, who included money managers, analysts and economists based in Nigeria and abroad, asked for their answers to remain anonymous.

Since June, Nigeria’s reserves have decreased by 17% to $37.4 billion, the lowest in more than two years. The slide has accelerated since the coronavirus outbreak in China rocked global markets and sent Brent crude prices down to around $55 a barrel. Last week, reserves in Africa’s biggest oil producer fell by $350 million, the most on a weekly basis since October.

All but three of the respondents said reserves would have to hit $30 billion before the central bank considers letting the currency fall, which is in line with what Governor Godwin Emefiele told investors last year.

Emefiele has vowed to keep the naira steady for now, saying in late November that the slide in reserves was not a cause for concern.

“In 2016 we had reserves as low as $23 billion and we survived,” central bank spokesman, Isaac Okorafor, said after the release of the survey. “We have proved them wrong before and we will do it again.”

On Wednesday, the central bank and FMDQ OTC Securities Exchange, a Lagos-based platform that oversees naira transactions, introduced new naira futures contracts of up to five years. The aim is to attract more foreign investment by helping investors hedge their currency exposure, Tumi Sekoni, an FMDQ managing director, said.

Emefiele may be able rebuild reserves after Buhari asked lawmakers this week to approve a sale of $3.3 billion of bonds.

“The planned Eurobond sale will temporarily ease investors’ concerns, but that will hold only if the level of reserves stays put in the long run,” said Guy Tossou, a portfolio manager with BNP Paribas in London.

Naira non-deliverable forward contracts fell on Wednesday, suggesting that devaluation pressure is easing. But three-month forwards still trade at 371.5 per dollar, around the highest since August.

The specter of a devaluation has reduced appetite for the Nigerian carry trade — one of the world’s most lucrative over the past year.

Societe Generale SA recommended to investors last week that they exit naira-denominated short-term debt.

“The reserves-accumulation trend is reversing and of course that raises a lot of questions among the portfolio investors,” Tossou said. Still, he doesn’t expect a devaluation until 2022.

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