Investors are fleeing emerging markets in record numbers and piling into the safe-haven greenback, with two emergency interest-rate cuts this month by the Federal Reserve doing nothing to diminish the dollar’s appeal.
With the American dollar more integrated into the world economy than ever before, its gains are an added stress for businesses and governments as they brace for soaring costs on their dollar debt.
The dilemma for emerging market central banks is that as they slash interest rates to support growth, they risk destabilizing their currencies as well if they cut too much.
Victor Silas, an investment analyst spoke to Nairametrics on the phone that, “It is no news that there is a school of thought arguing about a possible devaluation given the oil prices hovering around $30 per barrel in recent weeks as a round of the low demand side and a price war between Russia and Saudi and most importantly the continued depletion in our FX reserves since H2 2019 currently at 36bn dollars.“
However,he added that, “The CBN press release on 12 March stated that he size of Nigeria’s foreign exchange reserve remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand.”
Nigeria has reacted to the crisis triggered by Coronavirus and oil’s collapse in the same way that it did when crude last crashed in 2014 by trying to prevent the naira weakening and tightening capital controls.
With foreign reserves having fallen almost 20% since July, Nigeria needs a currency almost 40% weaker if Brent prices stay at $30 per barrel
What it means: This outlook will weaken investors’ confidence. It will generate speculative pressures on the currency. It will result in the depreciation of the naira exchange rate. It will trigger inflationary pressures, increase production and operation costs for businesses and will weaken purchasing power and ultimately undermine the welfare of the citizens.
Tempitope Busari, CFA treasurer at a leading Lagos based consumer finance firm in an email sent to Nairametrics added that, “As far as a stronger dollar goes, my view is that the USD/NGN rate will continue the upward trend at least at the ‘freer’ unofficial window.
“Recall that this window caters to the noisier segment of the market and as such, sustained pressure is seemingly inevitable. I don’t see the rates receding anytime soon. For the first time ever.
“Nigeria has about 50 cargoes of crude oil that have yet to find off-takers, coupled with the reality that oil price is very well below $30pb. The country’s FX earnings are being threatened, and this situation is not helped by the fact that our cost of crude oil production is still triple that of Saudi’s.
“It is only a matter of time before the official market follows – our imports and crude oil revenues dependent economy will force their hand if things continue this way.”
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 1.77% to 99.88. as at 10.50 am Nigerian local time