• Policy makers may opt for partial devaluation: Goldman Sachs
  • Borrowing costs also set to rise as inflation quickens

Nigerian policy makers may be about to loosen their stranglehold on the nation’s currency.

The central bank of Africa’s biggest economy will decide Tuesday on whether to adjust borrowing rates as evidence mounts that a recession is looming. Barclays Plc, Goldman Sachs Group Inc. and Renaissance Capital Ltd. are among banks predicting it will also carry out a de facto devaluation of the naira, or even a gradual removal of capital controls that have choked the economy of dollars needed to pay for imports from fuel to milk.

While President Muhammadu Buhari has opposed abandoning the naira’s peg of 197-199 per dollar since coming to power a year ago, his deputy Yemi Osinbajo announced a policy review on May 11 that “may feature” a devaluation. On the same day, officials allowed fuel importers to buy dollars from the black market, saying the central bank couldn’t provide enough. Foreign reserves have plummeted to their lowest in more than 10 years and the black market exchange rate has sunk to around 345, while naira forward contracts are pricing in a devaluation of about 24 percent to 247.50 in three months.

‘Full Out’

“Will they devalue? On the back of what the vice president said, it seems likely,” Ridle Markus, a Johannesburg-based analyst at Barclays’ Africa unit, said by phone on May 19. “But they need to go full-out. That means not just devaluing and hiking the policy rate, but also dropping their restrictive foreign-exchange controls. That’s the only way investors will regain confidence.”

Consumer inflation near a six-year high may also prompt Governor Godwin Emefiele to increase borrowing costs. Eighteen of 20 economists in a Bloomberg survey predicted an increase in the policy rate of between 50 and 250 basis points. Two forecast it will stay unchanged at 12 percent.

The economy contracted in the first quarter for the first time since 2004, shrinking by 0.36 percent as manufacturing, oil output, financial institutions and real estate declined, data showed Friday. Even before the figure was released, growth was forecast at 2.3 percent this year, the slowest pace since 1999, in large part because of the currency curbs, according to the International Monetary Fund.

Investment Slows

Foreign investment in Nigeria’s stocks and bonds has slowed to a trickle as the prospect of a devaluation and currency-trading restrictions deter buyers. Nigerian equities are down 5.7 percent this year, compared with a 0.9 percent loss for the MSCI Emerging Markets Index of stocks. Local government bonds have lost 9.2 percent, making them the only local-currency securities not to have gained among 31 emerging markets monitored by Bloomberg.

Last week’s decision to increase gasoline prices by 67 percent to 145 naira ($0.73) a liter and give retailers more freedom when sourcing foreign currency was a sign the central bank is considering a multiple exchange system, according to Goldman Sachs and Renaissance. They believe it may announce plans to let some companies buy dollars at an exchange rate weaker than the official one. Vice President Osinbajo said the government used a rate of 285 per dollar to calculate the new gasoline price.

“Following the deregulation in the fuel market, we expect a two-tier foreign-exchange regime of some sort,” Yvonne Mhango, an economist at RenCap, said by phone from Johannesburg on May 19.

Approval Needed

For that to work, however, banks will need approval to trade the currency outside the pegged interbank market, according to Dapo Olagunju, treasurer at Lagos-based Access Bank Plc.

“Banks cannot sell at 285 today because that’s not where the interbank rate is and they’re not usually allowed to deal in the parallel market,” he said. “We are still waiting for a formal announcement from the central bank.”

That may not come on Tuesday, according to Standard Chartered Plc. Buhari, who likened devaluation to “murder” in February, hasn’t yet responded to Osinbajo’s comments.

“There has been little official indication of any change in thinking,” Razia Khan, head of African research at Standard Chartered, wrote in a note. “We do not expect any big FX liberalization moves just yet.”

Time is not on Nigeria’s side. Its reserves may start falling even faster given its oil production, the source of 90 percent of foreign earnings, has dropped to around 1.4 million barrels a day -- the lowest in more than 20 years -- as militant attacks in the Niger River delta region increase. Brent crude dropped 1.4 percent on Monday to $48.03 a barrel, down 27 percent from a year ago.

“They’ll try to delay for as long as possible,” said Mark Baker, investment director at Standard Life Investments Ltd. in London, who added he’s buying Nigerian dollar-bonds in expectation of an “inevitable” currency devaluation. “The difference now is that both oil prices and production are much lower than they have been over the medium term. Adjustment is unavoidable.”

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