As Nigerian stocks and bonds surged after Muhammadu Buhari won last weekend’s presidential election, one asset barely budged: the naira.
The Nigerian currency has traded in a range of 198 to 200 per dollar since March 3, and remained anchored even as stocks jumped the most in five years and bond yields plunged to four-month lows. The currency faces the prospect of a sell-off when the central bank of Africa’s biggest oil producer removes trading restrictions imposed last year to reduce volatility. The question for investors wanting to get back into Nigerian assets is when that will happen.
“If you buy local bonds now you have to factor in how much the currency will move,” Claudia Calich, a money manager at M&G Ltd. in London, which oversees about $1 billion of emerging-market assets, said by phone on Wednesday. “It’s a tricky proposition.”
The naira has slumped 18 percent against the dollar as oil prices collapsed by almost half since June, prompting the Abuja-based regulator to lower banks’ trading limits and introduce a new dealing system in February that prevents lenders from buying dollars on the interbank market without matching orders from customers needing to import goods. The currency was little changed at 199.05 per dollar as of 11:06 a.m. in Lagos.
The central bank also sold dollars to support the naira, cutting foreign-exchange reserves to $29.8 billion, the lowest in a decade, according to HSBC Holdings Plc. Those measures have left the currency overvalued, according to investors including M&G, BlackRock Inc. and Investec Asset Management.
“One of the first big challenges the new government’s going to have to face is what on earth to do with the naira,” Samuel Vecht, who oversees $2.7 billion in five emerging-frontier-market funds at BlackRock, said by phone from London on Wednesday. “Steps have to be taken to ensure reserves don’t keep falling.”
Buhari’s win over President Goodluck Jonathan marks Nigeria’s first democratic transition of power from one party to another since independence from Britain in 1960. A former military ruler from the 1980s who lost the three previous elections, Buhari, 72, has pledged to clamp down on corruption, boost growth and create at least 1 million jobs a year. He won 52.4 percent of votes cast, according to tallies by the electoral authorities.
Nigerian assets mostly soared on Wednesday as Jonathan’s concession to Buhari, who will be sworn in on May 29, suggested the transition will be smooth. Stocks climbed 8.3 percent, the most among 93 global primary indexes tracked by Bloomberg. They gained another 3.4 percent on Thursday, reversing losses for the year, having been down 20 percent by Feb. 13.
Yields on Nigeria’s $500 million of Eurobonds due 2023 fell 19 basis points to 6.02 percent on Wednesday, the lowest since Dec. 8, and rates on benchmark naira bonds dropped 118 basis points to 13.81 percent, also the lowest since Dec. 8.
While naira forward contracts, traded offshore and exempt from the central bank’s restrictions, also rallied, they still suggest the currency’s depreciation is far from over. Naira six-month non-deliverable forwards fell 2.8 percent to 233.50 against the dollar, the lowest since Jan. 22. The currency changes hands among unofficial money changers at 226, Alan Cameron, an economist at Exotix Partners LLP in London, said in a March 19 note.
The naira’s current interbank value is appropriate and the discrepancy between that and the parallel rate isn’t an indication that it’s under pressure, central bank Governor Godwin Emefiele said at the last Monetary Policy Committee meeting on March 23-24.
The regulator may end the so-called order-based trading system introduced in February now elections are over, according to the Lagos-based Financial Markets Dealers Association, an industry body.
“As it is now, the market doesn’t know whether it’s going to start the normal two-way quotes it was used to,” David Adepoju, president of the FMDA, said by phone on Wednesday. “That is slowing down trade. I believe by next week the central bank might come up with something.”
Some foreign investors doubt it can hold off for long.
“It’s likely that the currency will devalue further,” Joseph Rohm, a money manager at Cape Town-based Investec Asset Management, which oversees $107 billion, said in an e-mailed note on Wednesday. “It will be very difficult for the new government to support the naira” given the slump in oil prices and low level of reserves, he said.