Nigeria’s lucrative carry trade is losing its charm and is putting the naira at risk of devaluation in 2020.
The country’s central bank offered rates that were once as high as 18% on bills known as open-market operations, or OMOs, sold to boost reserves and protect the naira. About 17 trillion naira ($47 billion) of these securities are now outstanding with around a third held by foreigners.
A chunk of OMO notes mature early next year and it’s uncertain whether foreign holders will renew. Yields on the securities are now lower at an average of 13%, and liquidity is limited after the central bank barred local pension funds from investing.
Dollar outflows from the country are higher than inflows and external reserves are down almost 10% since June. Oil revenues could support the naira if crude prices remain stable. Renaissance Capital estimates the currency is 28% overvalued, though. The downside risk is high.
According to reports from Moody’s Investors, Nigeria will probably maintain its system of multiple exchange rates, which the International Monetary Fund has long-urged it to scrap, until at least early 2020, according to Moody’s Investors Service.
Merging the naira’s various rates any sooner might force the government to weaken the currency and raise fuel prices, which would accelerate inflation, the ratings company said.
Nigerian monetary and fiscal authorities are likely to wait until investments in oil refineries and fertilizer plants, including by billionaire Aliko Dangote, reduce Nigeria’s imports of petroleum products.
While that may take another two years, it would put the government in a better position to stabilize fuel prices, which it caps at a level based on the central bank’s official naira rate, Moody’s said.
If the government merges the exchange rates, “they won’t be able to provide discounted dollars to oil marketers.” Aurelien Mali, a sovereign analyst with Moody’s, said in an interview in Lagos on Wednesday. “It means that either they have to increase pump prices or give subsidies to marketers, which would impact public finances. Neither option is credible at the moment.”