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Naira in free fall, hits 490/$, currency certified unstable

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The Naira crashed to a fresh all-time low level of N490 to the dollar in the parallel market on Friday, from about N480 exchange rate attained on Thursday.

Nigeria’s foreign exchange market was tension-soaked yesterday, as the Naira raced towards N500/USD1.

Dealers are expecting further rise today to hit the dreaded N500 mark.

ABOVE PHOTO: CBN governor Emefiele gives up on the Naira

LAGOS PARALLEL MARKET RATES- 30/09/16- ngn NGN

usd USD gbp GBP eur EUR

BUY/SELL BUY/SELL BUY/SELL

475/490– 585/600– 500/520

Surprisingly, the Naira appreciated significantly to N305/ USD at the official interbank market same day, although dealers said foreign exchange was not available to most of the bids.

The naira is now certified unstable as the daily rate of depreciation since the 26th September 2016 has averaged 2%. The naira is expected to depreciate further for the rest of the week. 

Meanwhile, the global investment bank, Morgan Stanley of United States of America, has warned that its MSCI Nigeria Indexes would be reclassified as Stand-alone next year, if currency restriction was instituted by the Central Bank of Nigeria, CBN.

The flexible policy adopted by the back removed the N197-N199 to the dollar foreign exchange band, allowing value of the national currency to the pull of market forces of demand and supply.

“Dollar is very scarce in the market right now because many people don’t know how low it will fall in the near term, so people are holding on to their hard currencies in order to watch the direction of the market,” one dealer said.

The President, Association of Bureau De Change Operators, Aminu Gwadabe, told Reuters that forex traders from neighbouring countries and some importers had also been moving in recently, mopping up dollars and putting pressure on the naira in a possible speculative bid.

Chronic dollar shortage plunged the local currency to a wave of depreciation, which economic and financial analysts have linked to speculative attack on the naira and increased demand from companies and individuals.

After trading between 423 and 425 for several weeks, the naira plunged to 428 last Wednesday. This came a day after the Central Bank of Nigeria’s Monetary Policy Committee retained the lending rate at 14 per cent contrary to calls by the fiscal authority, economists and stakeholders.

On the renewed pressure on exchange rate, Chief Economist and Head of Research at FSDH Merchant Bank Limited, said: “The major driver is the plunging oil receipt on account of low oil price and production. “Recall that oil exports had dominated our foreign exchange earnings in the last few years accounting for more than 70% of our export proceeds.

‘’The Foreign Direct Investment (FDI) has also dropped drastically because of no clear policy direction on the part of the government. ‘’The International Oil Companies (OICs) have stopped investments because of no clarity in respect of Petroleum Industry Bills (PIB).

“The Foreign Portfolio (FPIs) have also dropped drastically because of foreign exchange instability and weakness in the economic fundamentals of the country.” On the way out of the forex crises, he stated: “The monetary authority should ensure that it does not bow to the current pressure to reduce the interest rate.

This gap may continue until there is adequate supply at the inter-bank market.

“The implication of all these is continued increase in local prices worsening economic performance.”

AbokiFX research team has also observed through fundamentals and street research that this depreciation is driven by various factor as explained below:

Expatriates and Foreign Investors

Word on the street is that expatriates have lost confidence in the economy and are mopping up all the forex they can get in any of the three key currencies. The currency dealers are on standby to buy any volume supplied by a seller and are willing to buy at a premium.

This explains the steady 2% average daily growth rate of the dollar this week. This trend is expected to continue till the end of the week and might spill over to next week if the desired volume is not met.

Street Observation

AbokiFX street agents have witnessed currency dealers at various currency hot spots in Lagos, absorb forex from customers, buying everything a customer brings in, still asking the customers for more. Some have resorted to a bidding war for forex especially the US dollar and the Euro.

 N350bn naira released 

This has helped drive up demand for FX this week after the Finance Minister stated another N350bn will be released into the economy. The speculators have anticipated a demand for FX that would be needed for contracts by contractors and have decided to absorb the available FX in the market. There is also an active fx demand by contractors, whose contracts have been commissioned based on the N350bn disbursement.

Naira’s Rate of Depreciation

AbokiFX research team observed that the naira has depreciated at an average of 2% daily this week. Overall the naira has depreciated 13% against the dollar this month with most of the depreciation taking place in this week. Naira was N425 to $1 on1st September and is N480 to $1 on 29th September.

The rate of Depreciation this month had been 0% up till the 20th September, meaning that naira had been stable till then. Once the N350bn was announced, the demand for FX exploded giving a daily depreciation of N10 to the dollar. The typical monthly rate of change in the naira to dollar is +/- 0.5%.

 Foreign reserve

The foreign reserve has lost 3.2% ($800m) in September alone weakening CBN’s capacity to defend the naira. This has heightened the lack of liquidity in the fx market, leaving banks struggling to hold on to what they have. The foreign reserve now stands at $24.6bn 

Diaspora holding back

The regular remittance from diaspora is shrinking as those who send periodic remittances to Nigeria to invest have paused while they watch the naira depreciate daily in value. Many now want to see the naira settle before resuming the periodic remittances.

Investors Not coming

Global investors have ruled out further emerging market investments in Nigeria this year. The EU is struggling with the Brexit impact and the EU investors (UK included) have decided to pull back all their funding till the Brexit direction is clarified. They have indicated they will not be returning till 2017 when it is expected the Nigerian economy would have stabilized.

Manufacturers and Fuel Marketers

Demand for FX by both fuel importers and manufacturers has spiraled as their orders in the inter-bank markets are not fulfilled. They have permanently resorted to mopping up whatever they can get from the parallel market especially now that most families that went on holiday have returned with possibly some forex to exchange.

Fitch downgrade

This makes bond buying by overseas investors more difficult and puts pressure on the MPC to raise interest rates. This has increased investor risk which is factored in when considering buying Nigerian FGN bonds.

Inflation Spiraling

This eliminates any form of real interest rate as inflation now exceeds any form of investment return. Spiraling inflation also creates huge level of uncertainty making risk averse investors shy away from investing in the economy as return on investment becomes unpredictable. Inflation rate is 17.6% while MPR interest is 14%. This gives a real interest rate of -3.6% hence, not a productive investment upon maturity.

Banks will not sell to BDCs

Banks are trying to satisfy their customers before tending to any BDCs’ request for forex. This will continue until the banks believe they have an oversupply of forex which is not going to happen this year.

Conclusion

The aggressive depreciation of the naira this week is fuelled by internal demand and loss in confidence level in the naira.  AbokiFX believes the drive in naira depreciation will continue for the rest of the week and possibly spill over to early next week.

This depreciation is not influenced by the strength of the dollar in the international markets rather, it is influenced by capital flight and panic in the market, making people convert their naira to any of the three foreign currencies to lock in value.

CBN fights speculations

Earlier this week CBN appeared to have renewed its restriction measures on access and usage of independent foreign exchange resources following which commercial banks sent out e-mails to their customers reflecting the guidelines.

“All customers of financial institutions are expected to only use their accounts for their direct personal/company related transactions.

“No customer of any financial institution is permitted to engage in any activity that could be perceived as international money remittance service (IMTO) or bureau de change (BDC) activities without the express approval of the CBN,” the e-mail said.

Experts told Elombah.com that ‘’If the yields on the fixed income securities are above the inflation rate, foreign portfolio investors, FPIs, may soon be bringing investments to Nigeria and thus increase the supply of forex.

“Also the fiscal authority should communicate clear policies to drive the economy so that private investments (both local and foreign) can come in.

“Government should also ensure that the Petroleum Industry Bill, PIB, is passed so that the IOCs can have a clearer direction of what to expect.

“This will stimulate investments in that sector and ensure that foreign exchange flows in.

Government can also consider selling the proposed 5% stake in the NLNG through a transparent process.

“The CBN has been managing the exchange rate at the interbank market so that it does not move so much beyond a particular range.”

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