Nigeria’s Naira May Fall %15 If Crude Weakens- CitiGroup

Feb. 5 (Bloomberg)Nigeria’s naira may weaken as much as 15 percent this year should the price of oil, which accounts for 90 percent of the West African nation’s export earnings, decline to an average $35 a barrel in 2009, according to Citigroup Inc.

 The currency of Africa’s biggest oil producing nation may slump to about 173 per dollar by year-end, David Cowan, an economist at Citigroup, said in a telephone interview from London. The naira traded at 150.25 per dollar as of 3:48 p.m. today in Lagos, the country’s commercial hub.  Nigeria is very reliant on oil revenue to meet demand for foreign exchange,” said Cowan. “If the oil price averages around $35 a barrel then the naira will face significant further depreciation.”  Nigeria’s currency lost almost a quarter of its value following a Nov. 26 decision by the central bank to limit sales of dollars to commercial banks to protect its $52 billion of reserves as oil revenue shrank and foreign investors sold the nation’s assets.

Oil has slumped almost 72 percent since its July record of $147.27 a barrel, cutting Nigeria’s export earnings. Crude traded at $41.28 a barrel in New York today.  “The central bank can’t justify using its reserves to defend the naira in a country that is still very poor,” said Cowan. “It would be better off using the money to plug the fiscal deficit or funding additional infrastructure investment.”  

Reserves Decline  Nigeria’s foreign reserves fell by more than $10 billion from the end of November, even as the Central Bank of Nigeria rationed dollar sales to banks and stopped supplying money changers. Sales of foreign exchange to banks dropped as low as $100 million in November compared with demand as high as $1.3 billion in the same month.  The country’s reserves may fall further if a slump in oil prices prompts the central bank to attempt defending the currency. Nigeria’s middle class of about 20 million people have an estimated demand for foreign exchange of “between $20 billion and $100 billion” for the rest of 2009, according to Cowan.  Nigeria is faced with a policy choice,” said Cowan.

“Either they burn up reserves trying to defend the naira, or allow it to depreciate and save their reserves.” Policy makers will only manage to defend the current naira exchange rate of about 150 per dollar without using reserves if oil prices rebound to an average level of $50 a barrel in 2009, Citigroup said in a client note yesterday.