As Naira Regains Stability, Experts Fear Slide May Continue

           

The NairaNaira on friday regained some of its footing after an indirect devaluation in the official exchange rate versus the dollar on Wednesday by the Central Bank of Nigeria. But analysts reckon that pressures against the naira will continue to mount in 2015.

The Naira recovered to trade at 198.8 per dollar yesterday in the Inter-bank Market, from a peak of NGN206.3 earlier this month. Nonetheless, the devaluation does not mean the end of Nigeria's currency weakness, predicts Yvonne Mhango of Renaissance Capital.


The CBN on Wednesday scrapped its bi-weekly
auction of foreign exchange and in effect
dropped its official exchange rate band of 5 per
cent around the NGN168 per dollar fixing.
From now on, the central bank will sell dollars at
NGN198 which in practice, amounts to another
devaluation after last year's move from NGN155
per dollar to NGN168 per dollar.
The move was forced as the naira's continuing
slide had depleted the central bank's gross
reserves to a three and a half year low of just
$32.4bn.
“We think the deterioration in Nigeria's external
balances, on the back of lower oil prices, implies
that the naira will continue to weaken in the
short term. We forecast a current account (C/A)
deficit of 3.9% of GDP, assuming a $60/bl oil
price in 2015E. This following 12 years of C/A
surpluses. We acknowledge that there is upside
risk to our C/A deficit projection, particularly
given the significant devaluation of the naira
over the past six months, which should translate
into a pronounced import adjustment. We still
see the naira weakening to c. NGN220/$1, in the
short term,” Mhango told Financial Times of
London.
Stuart Culverhouse, chief economist at Exotix,
agrees. He still predicts that the naira will
weaken to 220-230 by the end of the year,
despite the authorities' reluctance to
countenance an exchange rate starting with "2".
“The changes may help to stabilise the naira in
the near-term and should ease pressure on
reserves. A smooth election would also help
reduce some of the FX premium,” said
Culverhouse.
“However, we expect that the balance of
payments will continue to remain under pressure
and without a more timely, coordinated and
credible policy response, further adjustments in
the exchange rate look likely. NDF rates have
widened slightly this morning, reversing
yesterday's narrowing. Three month NDF rates
are NGN/US$226 and twelve month rates at
NGN/US$275,” reports Bloomberg.