The Central Bank of Nigeria (CBN) last week threatened to sanction banks and other financial institutions that breach foreign exchange rules. The threat followed severe pressure faced by the naira in the parallel market, which has led to depreciation of the local currency to N370 to a dollar. Analysts foresee the naira recouping losses this week as the apex bank bares its teeth to the market, writes COLLINS NWEZE.
EXCHANGE rate stability is one of the core mandates of the Central Bank of Nigeria (CBN). For the past one week, the stability of naira has topped discussions.
Although the naira witnessed major pricing shake-up at the end of last week that pushed it to N375 to the dollar in the parallel market, it remained unfazed at the official market, where it traded at N306.95 to a dollar.
The local currency also closed at N366.75 to a dollar on the Investors and Exporters’ (I&E) Forex window.
A combination of dollar injections by the Central Bank of Nigeria (CBN) estimated at $500 million and support from the bureaux de change operators helped reduce naira losses after it touched N414 to the dollar at the parallel market last Thursday. The pressure on the naira is expected to persist this week.
In an emailed report to investors, the founder of New Markets Media & Intelligence, Gavin Serkin, said assurances from the CBN that it is not the verge of devaluing the Naira and that it was investigating those creating “panic” on potential charges of “economic sabotage” went some way to paring nine per cent declines against the dollar last week.
“The crash in global oil prices limiting dollar inflows had stirred speculation that the CBN could be forced to devalue. Instead, the CBN said it is working with the fiscal authorities to analyse the expected impact of coronavirus in order to respond comprehensively and ensure a stable financial system conducive for job creation and inclusive growth,” he said.
According to Serkin, the statement came after a committee set up to review the oil benchmark for the 2020 budget at $57 a barrel lowered its estimate to an average of $37, signaling lower government spending.
Foreign Direct Investment (FDI) on decline
The uncertainties surrounding the naira at local and international markets have reduced foreign capital inflows into the economy to $3.8 billion, representing a 32.4 per cent drop.
A report by the National Bureau of Statistics (NBS) for the fourth quarter of last year showed there was a continuous deceleration in foreign capital inflows since the second quarter of last year, driven by post-election uncertainties, falling yields, currency pressures and weakened investors’ confidence.
“In the fourth quarter of 2019, there was sustained decline across the board as foreign capital flows fell by 32.4 per cent yer-on-year to $3.8 billion, the lowest recorded during the year,” analysts at Afrinvest West Africa Limited, disclosed in emailed report to investors.
They explained that prior to the incidence of the Coronavirus (COVID-19) pandemic, which is wreaking havoc across the world; Nigeria’s external sector was already in a fragile state. “In our earlier reports, we had indicated a successive deterioration in external conditions in 2019. The National Bureau of Statistics has also confirmed our suspicions on the state of the economy,” they said.
They said there would be sustained downward trend in capital flows following global risk-off sentiments due to the COVID-19 pandemic. “The global decline in oil prices amid oversupply and falling demand for oil raises Nigeria’s risk, hence we expect foreign investors to be reluctant to hold naira assets. For trade, we anticipate weaker export growth due to plummeting oil prices ($32.9/barrel). With the major oil-producing countries engaged in a price war, we are not optimistic that the removal of curbs on Nigeria’s oil output would support more sales,” they said in emailed report to investors.
‘’We also expect a slowdown in imports given the disruptions to global supply chains and softening economic activities among trading partners such as U.S., Europe, China and India. The combination of trade deficit, negative current account balance and weak capital flows mean there would be a sustained moderation in external reserves, thus increasing the need for currency devaluation,” they added.
The drop in crude oil prices to $32.9 per barrel, the Coronavirus epidemic ravaging global economies, local and foreign investors dumping fixed-income assets and decline in the foreign exchange reserves are some remote reasons that brought the local currency under pressure.
Traders said some investors were worried about the value of the naira after oil prices plunged, pushing them to sell down their position on the debt and equity markets.
NBS report showed there was a 42.7 per cent year-on-year rise in foreign capital inflows to $24 billion in 2019, given the traction recorded in first half 2019. Foreign Portfolio Investment rose to $16.4 billion in 2019, representing a 38.7 per cent year-on-year uptick.
“This was driven by the 58.7 per cent year-on-year rise in money market inflows as investors remained shy of equities where foreign investments dipped 19.9 per cent year-on-year to $1.9 billion. We attribute the inflows into money market instruments to the relative calm recorded post-elections, which eased political risks, the report said.”
It said a 75.3 per cent year-on-year surge in inflows from other investments to $6.7 billion, buoyed foreign capital flows in 2019. Foreign direct investments (FDI), on the other hand, remained uninspiring, down 21.8 per cent year-on-year to $0.9 billion, reflecting the weak macroeconomic environment and lack of reforms to encourage investors.
Currency speculators under watch
President, Association of Bureaux De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, who confirmed the naira rates, said currency speculators and investors converting their naira asset to dollars were to blame.
According to Gwadade, many Nigerians and foreign investors, sensing the possible decline in the value of the naira, were moving their naira assets to dollars, to avoid erosion of value.
He said speculators had, in their rush to accumulate dollars, pushed the local currency to new low at N414 to a dollar before it made a surprise recovery at N370 to a dollar at the parallel market.
He confirmed that the naira decline at the parallel market was linked to two major immediate factors: speculators buying dollars with the hope of selling at higher margins and people coverting their naira to dollar assets.
The CBN, however, said the fundamentals in the market do not support devaluation of the naira.
“We wish to note with displeasure, the rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the CBN is on the verge of devaluing the naira, and triggering panic in the forex market. These rumours are false, unwarranted and calculated to serve their dubious and selfish ends,” the apex bank said in the stament.
“The apex bank said it has begun a robust and coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies to uncover the unscrupulous persons and forex dealers who are creating this panic, and the full weight of our rules and regulations will be meted out to them, including, but not limited to, being charged for economic sabotage.”
The CBN said it had maintained a relative stability in all segments of the foreign exchange market, which has enabled investors, households and other economic agents to plan and to conduct their genuine foreign exchange transactions with relative ease.
The drop in crude oil prices to $32.85 per barrel, the Coronavirus epidemic ravaging global economies, local and foreign investors dumping fixed-income assets and decline in the foreign exchange reserves are some remote reasons that brought the local currency under pressure.
According to the traders, selling pressure on local debt had persisted because of worries by fund managers on the implications of the fall in oil prices on naira value.
The external foreign exchange reserves have declined to $36.18 billion by March 9, from $37.45 billion they were on February 10, this year.
Analysts surveyed by Bloomberg said the CBN will likely opt for a devaluation of between 10 per cent and 15 per cent.
Gwadabe said the measures taken by the CBN, including domiciliary account controls, were making it difficult for the asset movers, who are also finding a way out.
“Speculators have lost money today. Some people bought dollars at N414 in the morning hours planning to sell at higher rates. Later this evening, after CBN interventions and moves by ABCON, the rates were brought down to N370 to dollar this evening. The two things playing out against the Naira is speculation and people converting their Naira to dollars,” he told The Nation.
Gwadabe said the action of the CBN, security agencies and the collaboration with ABCON have started impacting positively on the market.
He said the foresight of the CBN in implementing the domiciliary account rule has helped the put the naira relatively stable.
“I can confirm to you that people moving assets from naira to dollar. The CBN had seen the development and came with which places limit on the amount that can be moved and mode of withdrawal for deposited cash,” he added.
Gwadabe said the border closure and tight security at Nigeria’s land borders are also helping to ensure that cash movement is restated.
“There was dollar intervention yesterday, today and there will be intervention tomorrow. The CBN has committed to maintaining the stability and strength of the naira and I assure you that currency speculators are already running into loses,” Gwadabe said.
Analysts said the local currency will continue to come under pressure, but the CBN is committed to keeping it steady in line with its mandate of maintain exchange rate stability. The CBN spent nearly $16.56 billion to defend the naira in the last one year, The Nation has learnt.
Analysis of the regulator’s half year report showed that the apex bank defended the currency with $8.28 billion through its direct intervention within the first six months of 2019.
Financial analysis estimated that the same level of intervention, or even higher amount applied in accompanying six months ended December 2019.
The amount was given to different segments of the inter-bank foreign exchange (forex) market, the report said, indicating that the forex sales were meant to manage the demand pressure and ensure exchange rate stability, which are within the core mandates of the apex bank.
Despite the current pressure on the naira, CBN Governor, Godwin Emefiele has vowed to keep the naira steady for now, insisting that the slide in foreign reserves is not a cause for concern.