Devaluation Looms for Nigeria Even as Forwards Ease on Oil

LAGOS (Capital Markets in Africa) – The Nigerian naira’s recovery in the forwards market may be deceptive. The currency is destined to weaken, however, long policy makers hold out.

Six-month contracts declined to their lowest level since September last week as crude oil, Nigeria’s top export, advanced about 20 percent after OPEC agreed to a production cut in November. A drop in forwards would typically be a sign of growing confidence in a nation’s economy and currency, but not this time. Even as oil prices advance, Standard Chartered Plc and London-based Duet Asset Management say the nation needs to devalue the naira and loosen capital controls.

With dollars becoming scarcer and the economy on the brink of its first full-year recession since 1991, Nigerian businesses are being forced into the black market. There, each dollar costs 493 naira, almost 60 percent more than the official rate.

“Oil’s rise isn’t enough to eliminate the need for a change,” Ayodele Salami, who oversees around $450 million of African stocks as chief investment officer at Duet, said by telephone. Nigeria won’t attract inflows until it weakens its currency, he said.

While the naira has plummeted almost 40 percent since central bank Governor Godwin Emefiele in June ended a 15-month peg to the dollar, traders say it’s still being managed by the government. President Muhammadu Buhari, who has likened devaluation to “murder” in the past, said in a speech on Dec. 30 that he was still against floating the currency, Lagos-based Cable Newspaper reported.

“Eventually, they’ll have to revert to a more flexible currency regime,” said Samir Gadio, the London-based head of Africa strategy at Standard Chartered, which forecasts the official exchange rate will be steady for at least the first half of this year. “But for the time being, there’s no indication from policy makers that this will happen.”

Forward contracts maturing in one month rose 0.1 percent to 318.75 per dollar as of 1:54 p.m. in London, narrowing their spread over the official spot rate of 314.25 to 4.5 naira from 34 naira in October. Six-month contracts traded at 363.5, suggesting the naira will depreciate 14 percent in that time.