Analysts have been offering opinions regarding the fate of the Naira amidst the fall in oil prices, upcoming elections and insecurity in the North Eastern part of the country. Most predict the Naira is likely going to be devalued at the latest after the election whilst grimmer predictions suggest a devaluation before February next year (before the presidential election). This begs the obvious question? What is it that could make the CBN devalue the Naira? Having read through some of the comments made by analysts, I came up with the following theories.
Portfolio Investors
Portfolio Investors are people who invest in equities, bonds, fixed income securities and any investments that they can easily exit from. The latest data from the Nigerian Stock Exchange reveals that a total of N523billion came into the equities market with N527billion exiting between January and September 2014. Events in the last three weeks suggest more money may have exited the markets. To repatriate their money, Foreigners will have to convert the Naira proceeds from sale of stocks to dollars leveraging on their certificate of capital importation. This puts enormous pressure on the exchange rate.
Foreign Debts
Nigeria also has foreign debts which it services from time to time and when it does so, it does it in dollars or in the foreign currency of the lender. The private sector is also not excluded from foreign debts. Nigerian banks have borrowed billions of Naira in foreign denominated debts as they jostle to shore up their tier 2 capital. These debts are paid in forex, further placing pressure on our exchange rate.
Election Funding
Most people believe election periods always coincide with huge demands for forex. They sight politicians as the main culprits as many of them require forex to fund their activities. They often source for this forex in the already over stretched black market increasing the scarcity that currently persist.
Falling Oil Prices
Falling Oil prices has been dominating major financial news headlines in the past few weeks and doesn’t seem to be going away any time soon, Nigeria earns about 80% of its revenue from exporting oil as such a drop in prices is bound to affect the revenue that we get. In addition, the few dollar savings that we have can no longer be replaced that quickly when the CBN utilizes it to defend the naira. The external reserves is therefore depleting faster that oil revenues. This therefore suggest, a rule of the thumb way to shore up revenues may just be to depreciate the naira further ensuring that the government has at least enough cash to fund local projects and overheads.
Historical Data
Historical data also suggest a possible devaluation. The last time Nigeria faced of with oil price shocks (2009 and 2011) the CBN depreciated the naira. Figures from the CBN suggest as at November 12, shows about $30.6billion has been spent already in meeting up with forex demands this year. This is the highest since 2008 and already dwarfs the previous highs of $27billion recorded in 2011. In fact, we have now spent $2.5billion more than what was spent in the whole of 2011 and just $200k shy of the entire 2013 figures. The CBN has already spent $4.3billion between October and November this year with about $1.3billion sold in the first half of November 2014 alone. This is beginning to look unsustainable and may see more drastic measures by the CBN to stop the depletion of reserves.
