Nigeria’s naira slumps as much-criticised 15-month currency peg ends in Lagos

Investment into Nigeria has shriveled as foreigners are deterred by capital controls

NIGERIA’S naira weakened 22% to 253.50 per dollar after the central bank allowed the currency of Africa’s biggest economy to float freely on Monday. 

Demand for foreign currency has built up to about $3 billion since capital controls were imposed 15 months ago to defend the currency’s peg of 197-199 per dollar, according to Chapel Hill Denham Securities Ltd. 

Even as the naira weakens, local stocks may extend the best three-day rally since April 2015 in anticipation of a return by foreign investors and as the risk of exclusion from global indexes fades. Banks may gain as the policy change allows them to profit from foreign-exchange volatility and boost trading income, analysts at Exotix Partners LLP said. 

Central bank Governor Godwin Emefiele announced the end of the currency fix on June 15, surprising analysts who had expected the oil producer to turn to a two-tiered system with tighter controls on the exchange rate. 

Nigeria has held the peg since March 2015, spending about $2.7 billion of its reserves, 9.3% of the total, this year alone, even as other oil exporters devalued their currencies as crude prices slumped by more than half since 2014. 

‘Green shoots’ 

“We never imagined a free-floating naira,” Yvonne Mhango, a Johannesburg-based analyst at Renaissance Capital Ltd., said. “This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate.” 

The naira may weaken to 390 by year-end before retracing, Renaissance said in a June 16 note. 

Investment into Nigeria has shriveled as foreigners are deterred by capital controls, while local businesses have struggled to import raw materials and equipment. International carriers including United Airlines and Iberia have halted operations in the West African country, saying they couldn’t move revenue out.

High volatility

“We see a lot of volatility from high dollar demand,’’ Olubunmi Asaolu, an analyst at Lagos-based FBN Quest said by phone. While the naira could stabilise at about 290 per dollar, any move toward 350 “will cause mayhem” and prompt the central bank to moderate the drop by supplying additional greenbacks. 

The central bank selected a group of primary dealers through which the naira will be traded. There will only be one official exchange rate and the bank will intervene in the market to buy or sell foreign exchange “as the need arises,” Emefiele said as he unveiled the new policy. 

Demand for dollars won’t be satisfied on Monday alone and may take more than a week to clear, said  Tajudeen Ibrahim, head of equity research at Lagos-based Chapel Hill Denham Securities Ltd. It might also be a while before buyers from abroad feel confident enough to acquire Nigerian assets, he said.

Hard currency

“The new market will start off slowly as investors will be cautious as they try to understand it,” Ibrahim said. “We’re unlikely to see foreign investors coming back very quickly. They’ll take their time. It might be a couple of weeks before we see new foreign money being invested.” Heineken NV, which controls Nigeria’s largest brewer, views a rate of 250 to 280 naira per euro, or 283 to 316 per dollar, as “not that bad,” said Chief Financial Officer Laurence Debroux. 

Not having access to hard currency has been an obstacle to operating in Nigeria and a return of liquidity in Africa’s most-populous nation of 170 million people would be “great,” he told a June 16 investor meeting.

Futures trading

The turnabout in foreign-exchange policy came after gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to 15.6 percent in May. MSCI Inc. said June 15—before the central bank’s announcement—it may drop Nigerian stocks from its Frontier Markets Index because of capital-mobility issues. 

To help reduce currency volatility, the central bank will introduce over-the-counter naira futures trading, which would move non-urgent foreign-exchange demand from the spot to the derivatives market, Emefiele said. 

There will be no pre-determined spread on spot transactions, he said. Fair value for the naira is around 300 per dollar, Michael Bollinger, head of emerging-market asset allocation at UBS Wealth Management in London, said Friday. “This numer will move a lot depending on how the central bank will manage the exchange rate.”

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