Thursday, February 19, 2015 4:25 PM / Meristem Research
…a prelude to further devaluation
In what was considered to be a bold and decisive policy pronouncement in its November 2014 MPC meeting, the decision was taken to devalue the naira by 7.74%, owing to tumbling oil prices and consequently weakening reserves.
Despite the above, pressure on the local currency continued to mount, most especially as political tensions increased market apprehension. The recent postponement of the nation's general elections by six weeks from February 14th 2015 triggered further volatility in the currency market. Dealers were forced to stop trading in FOREX twice in the week as the Naira depreciated by over 2% on both days, thus triggering the circuit breaker. Consequently, the Naira crossed the NGN200/USD mark sending financial market indices south.
Outlook still fuzzy in the local terrain
Events in the domestic space continue to dampen the country's economic outlook, as the military declared its inability to guarantee security of lives and property during the elections as initially scheduled. This, necessitated the postponement of the elections to aid the Nigerian military, and allied forces of Chad, Niger and Cameroon, bolstered by support from the African Union (AU) and ECOWAS to battle the insurgency in the North-eastern part of the country.
The political scene remains very tense, as both dominant political parties craft strategies on how to win the elections. Indications regarding another postponement of the elections given the security concerns in the country, as well as rumors about an interim government continue to cast doubts on the likelihood of polls holding on the newly scheduled dates.
…Policy makers on a slippery slope
Given the series of pronouncements coming through from the apex bank in recent times, we are inclined to opine that the rate of economic recovery might be tempered. We highlight the build up to the eventual shut down of the RDAS below;
17th December 2014
CBN announced the reduction of Foreign Exchange Trading Position of individual Authorized dealers to zero percent from 1% of Shareholders Funds at the close of each day.
18th December 2014
Funds purchased from banks for their respective customers at the interbank forex market must be utilized within 48 hours from date of purchase, failing which, such funds are to be returned to the CBN for re-purchase at the Bank’s buying rate.
12th January 2015
Exchange Trading Position of Authorized dealers revised from zero percent to 0.1% of Shareholders Funds, while holding period of funds purchased at the interbank was reviewed to 72 hours, failing which such funds are to be returned to the CBN for re-purchase at the Bank’s buying rate.
21st January 2015
Sales at RDAS to BDCs and other Authorized Buyers was cancelled, while weekly sales of forex to BDC’s to be sustained by CBN based on liquidity needs of the market. Also, Exchange Trading Position reviewed to 0.5% from 0.1% of the Shareholders Funds.
12th February 2015
Mr. Godwin Emefiele on the floor of the Exchange reiterated the CBN’s stance not to float the currency, urging the investing community not to panic after the elections were postponed, while re-emphasizing the resolve of the CBN to keep supporting the Naira for legitimate transactions.
13th February 2015
Ibrahim Mu’azu, Central Bank spokesman said the apex authority was not planning to devalue the naira again and would continue its “special interventions”. The interventions which had over time been occurring became a cause for worry when the CBN sold USD401mn on Friday, 13th February 2015 at NGN198.50/USD.
16th February 2015
Reserve levels plunged to USD32.7bn, following a USD1.1bn decline in the first two weeks of February.
Shut down of RDAS/WDAS Window
18th February 2015
The CBN closed the RDAS/WDAS FOREX window, announcing that all demand for FOREX should be channeled to the interbank FOREX market where the CBN will sell to meet excess demand by the close of each day at NGN198.00.
… Further depreciation may be imminent
Despite CBN’s reassurances that there would not be a further devaluation of the local currency, there were leading indicators that pointed towards such as the CBN intervened at the interbank market prior to the closure of the official window (RDAS) within the range of NGN198-NGN199.
The situation has seemingly come to pass, as we take the most recent happenings (closure of the RDAS/WDAS window) as a “tacit devaluation”, NGN/USD168 to NGN/USD198 (15.15%).
Although, we imagine that this move will curb speculative demand and round tripping on the Naira, whilst also moderating the level of decline of the reserves, we fear that the pressure on the external reserves will persist.
We anticipate that demand in the interbank market may increase significantly consequently leading to larger quantum of interventions in the expected daily operations. We believe this development will further test the resolve of the Bank to defend the Naira especially in the short to medium term, given the current level of External reserves (USD32.5bn). Also, worrisome news flows which continues to plague the financial markets, may trigger additional capital flight which would further pressure the reserves.
On the back of the foregoing, we expect the naira to trade within tight bands around NGN/USD±200 in the short term, barring further unfavourable news flows on the horizon. Nevertheless, we suspect that official devaluation remain imminent.