The Central Bank of Nigeria will devalue the naira within the next 18 months, a new report by the Nigeria-based Financial Derivatives Company Limited has indicated.
The Managing Director, FDC, Mr. Bismarck Rewane, in the latest edition of its bi-monthly Business and Economic Update, noted that the nation’s external reserves had “fallen below the psychological resistance level of $41bn because of the increased frequency and magnitude of the CBN intervention in support of the naira.”
The report read in part,
“With this level of external reserves, Bank of America has downgraded the Nigerian currency-linked instruments on fears of further value haemorrhage in the market. A naira adjustment is only a question of time. Historically, exchange rate adjustments in Nigeria have always been a result of involuntary policy actions. Whilst a strong naira is a ‘good to have,’ a realistically valued naira is a ‘need to have’.
“Although we are convinced that a naira adjustment will take place during the next 18 months, predicting the timing of it is trickier.”
According to the FDC report, the CBN may either devalue the naira shortly after the nominated CBN Governor, Mr. Godwin Emefiele, resumes office in June or he may postpone the decision after the elections in February 2015.
The report stated,
“The new CBN governor, who will formally take office from June at the expiry of Sanusi’s term, allows a one-off depreciation. He or she (but expected to be Godwin Emefiele, who was nominated by Jonathan within hours of Sanusi’s suspension) is likely to be concerned by the erosion of reserves and could blame the need for a readjustment on events before their time in office. There would not be a need for a very large depreciation, perhaps to N165 or N170: US1, but such a move would head off market speculation and give the new governor time to settle in.
“A depreciation before the 2015 elections could be considered politically unpalatable, given that it would be unpopular with the electorate, both by raising import prices and as a sign of weakness in the administration’s economic management. The new CBN governor, put forward by the President (albeit subject to parliamentary approval), may decide that it would be prudent to delay a devaluation until after the conclusion of the elections due next February. Such devaluation might need to be larger in magnitude, given that reserves would have fallen further in the meantime. A fractious election period and our expectation of outbreaks of unrest would also further under-mine market confidence in the currency. On balance, we believe that the first scenario is slightly more likely, but would not be surprised to see the second come to fruition.”
The report stated that under either situation, the nation’s position as a key frontier market was set to wane over the next 18 months.
The writing has been on the wall
what is the likely effect on the stock market both in the short and long term?