Nigeria’s Currency Chaos Deepens as Bets on Devaluation Rise

LAGOS, Nigeria, Capital Markets in Africa: As investors increasingly bet the bottom will drop out of the naira and the vice president hints at a devaluation, the man who calls the shots – President Muhammadu Buhari, who has resisted letting the currency weaken since coming to power a year ago, likening it to “murder” — has kept quiet.

“I won’t believe it until I see presidential ownership of it,” Alan Cameron, an economist at Exotix Partners LLP in London, said by phone. “The most likely scenario is still that they will run reserves down to a point where they have no choice but to make a decision. That will come, but not for another six months, if not a year.”

Forward contracts suggest the currency will plunge 29 percent in three months to 257 against the dollar, compared with 7.5 percent a week ago. That follows a signal from regulators that some black-market trading will be tolerated. Nigeria’s central bank has held the naira at 197-199 per dollar since March 2015, deepening the worst crisis this century in Africa’s biggest economy.

Investors from Alliance Bernstein LP to Morgan Stanley have sold naira stocks and bonds since Nigeria’s central bank started pegging the currency and introducing capital controls, which included restrictions on foreign-exchange trading and imports. Naira-denominated government bonds have lost 8.8 percent in dollar terms this year, making them the only ones aside from Egypt and Mexico not to have gained among 31 emerging markets tracked by Bloomberg.

The nation’s foreign reserves have dropped 29 percent since mid-2014 to $26.7 billion as the central bank props up the currency while oil revenue and foreign investment dwindle. The naira was little changed at 199.05 per dollar by 10:08 a.m. in Lagos.

Vice President Yemi Osinbajo on May 11 announced a review of the currency regime that “may feature” a devaluation as a way of boosting inflows. Earlier that day, the state oil company raised gasoline prices 67 percent and allowed fuel importers to buy foreign-exchange from any source, including the black market, on which the exchange rate is 350 to the dollar. Officials later said they used a rate of 285 per dollar to calculate the new gasoline price.

These moves were “a deviation from the president’s staunch stance against devaluation and the first time public officials had publicly offered a difference in opinion on devaluation,” Lanre Buluro, a Lagos-based analyst with Primera Africa Securities Ltd., said in an e-mailed note. A devaluation may be “imminent,” he said.

Goldman Sachs Group Inc. predicts a more complicated outcome. The decisions last week suggest the government will sanction a “multiple exchange-rate system” with importers and investors getting access to different rates according to their perceived importance, JF Ruhashyankiko, a London-based analyst at Goldman Sachs, said in a note. “It is less clear whether it will also lead to a gradual lifting of capital controls. The only way to resume capital inflows is to lift the capital controls.”

So far, the central bank is maintaining its stance that the official exchange rate is fair and that any devaluation would only boost inflation, which already accelerated to an almost six-year high of 13.7 percent in April as the scarcity of foreign-exchange affected prices of imported goods. Speculation about a devaluation is a “false rumor,” Isaac Okorafor, a spokesman for the Abuja-based central bank, said by phone.

The central bank’s Monetary Policy Committee meets from May 23-24. At the last meeting in March, Governor Godwin Emefiele affirmed its “strong commitment” to keeping the naira stable. The message will probably be the same this time around, Samantha Singh, an strategist at Standard Bank Group Ltd. in Johannesburg, said in a note on Tuesday.