The Nigerian government may not devalue its currency enough to restore credibility in its economy, leaving potential investors stuck on the sidelines waiting for more, say analysts and investors. “If you believe the black market, the naira should be trading somewhere north of 300 [to the U.S. dollar],” said Mark Baker, EM fixed income investment director at Standard Life, which manages $1.4 billion in assets. That compared to 199 on June 7. The black market rate on June 7 was 361, according to Lagos-based AbokiFX.
“I would be surprised if they took those drastic steps. Maybe somewhere towards 250 would be more realistic,” said Baker.
The naira has been held at 197-199 to the dollar since March 2015, piling pressure on the economy as businesses are starved of dollars and foreign investment dries up. The May 24 announcement by Central Bank Governor Godwin Emefiele that there would be some “flexbility” introduced to the exchange rate was welcomed, though he had yet to detail the plan as of June 7.
The uncertainty has prompted speculation that the government does not know what to do. “The reason why we have seen a delay is they are trying to come up with a system that’s not going to allow a crazy amount of volatility right from the outset,” said Alan Cameron, chief economist at Exotix Partners. “They don’t want to be in a position where they are struggling to defend the naira at a much weaker rate.”
According to Exotix, a rate of 280/290 would restore some credibility in the economy. Naira non-deliverable forwards suggest that the currency adjustment will be less than initially expected. After peaking at 269 on May 25, the one-month NDF fell to 238 on June 6. The three-month peaked at 291 on May 25, before falling to 278 on June 6.
Adding to pressure on the currency is a backlog of dollar demand as foreign companies seek to repatriate naira profits. “If you do not clear the backlog and just let the market set the exchange rate then it will overshoot aggressively,” said Investec portfolio manager Antoon de Klerk. He estimates $5 billion in pent-up demand for dollars.
A spokesman for the Nigerian central bank, Isaac Okorafor, said the announcement was for “more flexibility” and did no specifically mention a devaluation. “We will come up with a framework at the appropriate time,” he added.
Article was published with permissionÂ
THESE SO CALLED ANALYSTS OF OUR FOREX SHOULD NOT OVER RATE THEIR KNOWLEDGE OF NIGERIA’S ECONOMY. I UNDERSTAND THEIR POSITION WHICH IS TO SAVE THEIR RESPECTIVE JOBS. NIGERIA WILL NOT ALLOW ANY FOREIGN MANIPULATORS OF OUR ECONOMY TO DICTATE TO US WHAT WE SHOULD EVEN KNOW BETTER THAN THEMSELVES. TO ME, THE DOLLAR IS TOO HIGH COMPARED TO THE PREVAILING ECONOMIC OUTLOOK AND PROJECTION OF THE NAIRA. NIGERIAN ECONOMY, UNDER NORMAL CONDITION, IS NOT THAT BAD THAT WILL MAKE NAIRA TO EXCHANGE FOR OVER N300 FOR ONE DOLLAR! OUR RELIANCE ON CRUDE OIL REVENUE HAS THWARTED THE BUDGET OF THE FEDERATION WHICH IN TURN HAS ADVERSE EFFECT ON THE ECONOMY. UNDER NORMAL CONDITION, THE DOLLAR SHOULD NOT EXCHANGE FOR MORE THAN N150.00K FOR A DOLLAR! IT IS OBVIOUS THAT OUR CRAZE FOR FOREIGN GOODS AND LUXURIES HAVE PLAQUE THE NAIRA AND THE FOREX. WHAT THE CBN MUST DO AND QUICKLY TO, IS TO MANAGE THE OUTFLOW OF OUR FOREX. THAT IS TO CHECKLIST THE NON ESSENTIAL IMPORTABLE COMMODITIES IN FAVOUR OF HIGHLY IMPORTANT GOODS. A STUDY OF THE ESSENTIAL GOODS THAT CAN BE SUBSTITUTED WITH LOCAL GOODS SHOULD BE ENCOURAGED AND FURTHER DEVELOPED. ESSENTIAL GOODS FOR THE INDUSTRIES SHOULD BE GIVEN PRIORITY OVER THE NON ESSENTIAL GOODS BASED ON THE AVAILABILITY OF FOREX. UNFORTUNATELY, THERE ARE NIGERIANS WHO ARE AIDING AND ABETTING FOREIGN INVESTORS TO CAT AWAY OUR HARD CURRENCIES. THE FACT REMAINS THAT THE AVAILABLE FOREX ARE NO LONGER CHEAP AND THE FEW AVAILABLE FOREX SHOULD BE JEALOUSLY PROTECTED AND GUIDED. LET ALL NIGERIANS COOPERATE WITH THE PMB ADMINISTRATION AND LET US ALL HAVE THE BELIEF THAT HIS PROJECTION OF THE ECONOMY WOULD SUCCEED.