Nigeria naira remains under strain after devaluation

Nigeria will probably need to weaken the naira further following its devaluation last week, while the pressure the currency’s under will restrict how much the central bank can cut interest rates on Tuesday, according to analysts.

The Monetary Policy Committee of Africa’s oil producer is meeting following Governor Godwin Emefiele’s decision to depreciate the exchange rate used by foreign bond and stock investors, which had been largely pegged since 2017, about 4% to 380 per dollar.

Other major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than $30 a barrel. Russia’s ruble is down by 15% and Colombia’s peso by 14%.

The derivative and black markets suggest the naira is still under plenty of strain. The price of three-month non-deliverable forward contracts has surged to 421 naira per dollar, signaling traders see another 10% devaluation in that period. One-year NDFs rose above 500 for the first time on Monday. The black-market rate has weakened to 403 from 380 this week, according to abokifx.com, a Lagos-based website.

“While it’s commendable that they’ve weakened the currency, it falls short of our fair value estimate of 410,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg, said. “It would be positive if the central bank were to also introduce a flexible foreign exchange rate, and move away from near peg.”

The Abuja-based central bank will likely lower its key rate by 50 basis points to 13%, according to a Bloomberg survey of analysts. That may help the economy, which will be hit by lower crude prices and the spread of the coronavirus, with the government suspending international flights and closing land borders on Monday. But it would still leave Nigeria with one of the highest base rates globally.

Oil accounts for about half of government revenue and 90% of exports. Foreign reserves have decreased 20% since July to $35.9 billion. Nigeria started offering crude at an unusually low discount from next month in an effort to undercut its rivals.

.Bloomberg

News Category: