Nigeria May Devalue Naira Target Range as Currency Drops
Nigeria’s central bank will probably lower its targeted trading range for the naira as dwindling foreign-exchange reserves and falling oil prices undermine its ability to halt the currency’s slide, FBN Capital Ltd. said.
Policy makers may adjust the exchange rate to within a 3 percentage-point band of 160 per dollar from 155 over the next six to nine months, Gregory Kronsten, an analyst at Lagos-based FBN Capital, said in an e-mailed response to questions July 18. Lower crude prices are making “it more difficult for the central bank to hold the line on the naira exchange rate,” he said. FBN Capital is Nigeria’s fourth-biggest broker by trading value on the Nigerian Stock Exchange, according to the bourse.
The naira traded above the band for the first time on a closing basis on June 7 on the interbank market and has ended trading above the peg each day since June 25. Nigeria’s central bank, which sells dollars at auctions on Mondays and Wednesdays to support the naira, sold $700 million last week, compared with $600 million the previous week, at 155.76 to 155.79 per dollar.
Nigeria Central Bank Governor Lamido Sanusi, 51, in November 2011 devalued the midpoint of the bank’s exchange-rate range at its twice-weekly auctions from 150 naira. International reserves of Africa’s second-biggest economy have declined more than 2 percent this month to $46.9 billion on July 18 as the central bank boosted sales to meet demand amid declining oil prices, the source of more than 95 percent of Nigeria’s foreign exchange income.
The naira strengthened less than 0.1 percent to 161.18 per dollar as of 10:56 a.m. in Lagos. The currency has weakened 3 percent this year compared with a 0.5 percent decrease in the currency of Angola, which vies with Nigeria as Africa’s top oil producer.
Two calls to Ugochukwu Okoroafor, a spokesman for the Abuja-based Central Bank of Nigeria, weren’t answered July 19. Another call today didn’t connect.
Bonny Light crude, Nigeria’s main export, rose 0.1 percent to $109.98 per barrel last week. The grade climbed to as high as $120.54 on Feb. 8 and fell as low as $100.31. Nigeria’s oil output slid for a third month in June, dropping by 70,000 barrels a day to 1.88 million barrels amid theft and damage to infrastructure, the International Energy Agency said July 11.
“The oil price has rebounded lately and looks more supported” even though “crude oil production reached new lows in June,” Samir Gadio, an emerging-markets strategist with Standard Bank Group Ltd.’s London-based unit, said in e-mailed comments. “In the absence of capital inflows over the past two months, the CBN has had to step up its foreign currency auction and direct sales to banks to address the dollar demand-supply mismatch.”
Sanusi held the benchmark interest rate at a record 12 percent for the 10th consecutive meeting on May 21, to check inflation and stabilize the naira. The Monetary Policy Committee will probably hold the rate when it announces the outcome of its latest decision tomorrow, according to all 14 economists surveyed by Bloomberg News.
“Despite the recent moderate decline in foreign exchange reserves, the central bank still has enough ammunition to defend the naira for some time,” said Gadio. “The risk is also that the CBN may be tempted to tighten liquidity conditions further at the next MPC or in coming weeks, although the surprisingly low June inflation rate probably reduces the possibility of a formal hike in the interest rate for now.”
The West African nation’s inflation rate fell to 8.4 percent in June from 9 percent in May, the National Bureau of Statistics said July 16. Yields on the country’s $500 million of Eurobonds due July 2023 fell one basis point, or 0.01 percentage point, to 5.89 percent.
The central bank may increase its exchange-rate band to 160 per dollar to increase costs for importers, Sewa Wusu, analyst at Lagos-based Sterling Capital Ltd, said by phone. This step “can serve as a check on dollar demand, thereby reducing pressure on reserves.”
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