Oil concerns drive slide in Nigerian naira

Date:

naira-exchangeNigeria’s currency slid as much as 1.9 per cent to a record low of 177.25 per US dollar on Thursday ahead of a crucial central bank meeting next week, where the onus is on policy makers to come up with something decisive to quell rising concerns of a devaluation.

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After recovering some of its footing last week, the African country’s stock market also dropped, falling as much as 3.8 per cent to a one and a half year low before paring its decline to 2.1 per cent.

Nigerian markets have come under intense pressure this month. Investors are increasingly concerned at the swelling Boko Haram Islamist insurgency in the predominantly Muslim north, but the biggest factor has been the slide in oil prices.

Oil is a vital driver of the Nigerian economy and a big contributor to government finances, but production has stagnated even as rival supplies have climbed. This summer the US failed to import crude from Nigeria for the first time since records began in 1973, according to a report by Deutsche Bank this week.

Unlike some other big producers, Nigeria was “badly prepared for declining oil revenues”, wrote Oliver Masetti, an analyst at Deutsche Bank. “Despite elevated oil prices over the last few years, the country did not build strong fiscal and external buffers.”

The central bank has periodically intervened in the currency market during the past two weeks to prevent the weakness from deepening into a rout, but so far with little success and at the cost of depleting its financial backstop.

Foreign currency reserves slipped to just $37.6bn at the end of last week, with further declines expected this week.

Local and international analysts are speculating that Nigeria will eventually be forced to devalue, and non-deliverable forwards – contracts that allow investors to bet on future currency movements – imply that fund managers expect the currency to fall to 201.5 to the dollar in 12 months.

The central bank is meeting on November 24-25, and Stuart Culverhouse, chief economist at Exotix, said it was time for a “strong response” from policy makers to steady Nigeria’s financial markets.

“The pressure on the naira poses a significant problem for policy makers, and the timing, ahead of February’s presidential election, could not be worse,” he wrote in a report.

Mr Culverhouse said the central bank should introduce a 10 per cent devaluation and lift interest rates 2 percentage points to buttress the naira.

“Both measures would signal a bolder policy response, and complement each other,” he wrote. “We think the market is expecting a tightening at next week’s [monetary policy committee meeting], and devaluation is increasingly consensus too. Not doing either risks further damage to market sentiment.”

 

Culled from FT

 

 

Babatunde Akinsola
Babatunde Akinsolahttps://naija247news.com
Babatunde Akinsola is aNaija247news' Southwest editor. He's based in Lagos and writes on the Yoruba Nation political issues, news and investigative reports

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