FOREX Africa: Nigeria’s Currency Devaluation Is A Matter of ‘How Soon’

FOREX Africa: Nigeria’s Currency Devaluation Is A Matter of ‘How Soon’

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk.

When To Move

For a while now investors with interests in the Nigerian market have been expecting the central bank to devalue the local currency after it tumbled against the dollar for most of last year.

The naira, which lost more than 22 percent last year, has already lost a huge chunk of its value so far in 2016 on the unofficial (black) market to touch an all-time low of 305 to the dollar earlier this month.

But officially the Central Bank of Nigeria, which introduced tough “currency saving” trading rules last year to stem the rapid fall, still pegs the local unit at 198 to the greenback, something that investors have complained bitterly about.

The Nigerian non-deliverable currency forwards shows that markets expected the naira exchange rate at 265.00 to the dollar in six months time, and at 284.00 to the dollar in 12 months’ time.

Despite growing pressure, including requests by the International Monetary Fund (IMF), to devalue its currency, the West African nation has remained adamant on keep its currency fixed at a lower rate than what market forces dictate, while restricting access to dollars.

According to rating agency Standard & Poor’s, the decision to devalue the naira should be expected to happen at some stage this year and in gradual adjustments, Reuters reported.

“Their line has been to try to hold it as much as possible, and they are trying to continue that policy…alongside the restrictions on imports as well,” Ravi Bhatia, director of Sovereign and International Public Finance at Standard & Poor’s, told reporters in a briefing on Thursday.

“But at some point they are going to have to move,” Bhatia said, adding he expected this to happen in one or two increments.

Nigeria’s currency woes started with the sudden sharp fall in crude price on the international market in the last quarter of 2014, hurting the country’s largest source of revenue and hard currency.

The country is the largest oil producer in Africa and depends on the commodity to finance over 70 percent of its annual budget.

With crude prices, now at about $30 a barrel, headed for the worst January drop in 25 years, Nigeria’s cash crunch seem far from over and could see the naira drop to new record lows in coming weeks and months and with this decline a devaluation will only be a matter of ‘when’ and not ‘why’.

Venezuela’s Policy

The country has seen a continuous deceleration of economic growth since last year. It is also leading the regional fight against Islamic extremist group Boko Haram, which launched an insurgency in northeast Nigeria in 2009.

In October, CBN’s Monetary Policy Committee warned that the Africa’s largest economy could be headed for a recession if proactive steps were not taken to revive growth in key sectors including agriculture and manufacturing.

Financial Times report compared Nigeria’s foreign exchange rate policy to Venezuela’s and China’s failed equity market strategy and said it it will not help in reassuring foreign investors who already have one foot on the exit.

“The effect is akin to calling last orders at a crowded bar,” John Ashbourne, Africa economist at Capital Economics, told Financial Times. “It is hardly confidence-inspiring that Nigeria is copying a Chinese policy that is widely seen to have failed.”

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