Nigeria’s Naira Plummets in Shift to Free Float After Oil Slump

LAGOS, Nigeria, Capital Markets in Africa: Nigeria’s naira tumbled as the central bank ended a 16-month-long currency fix that caused investors to flee and sent the economy to the brink of a recession.

The currency of Africa’s biggest economy fell 24 percent to a record 260.5versus the dollar, from Friday’s rate of 199, before paring the decline to trade 22 percent weaker at 255 by 12:51 p.m. in Lagos, the commercial capital. The naira was quoted at 254 when the interbank foreign-exchange market opened on Monday, removing the peg of 197-199 that the central bank had in place from February 2015. It could weaken further as trading increases, according to analysts including Standard Chartered Bank.

The central bank started auctioning dollars in the spot and forwards markets around midday to try and clear a backlog of orders for hard currency, according to a person with knowledge of the transactions who asked not to be identified as the information isn’t public. While the size of the auction wasn’t disclosed, the backlog is around $3 billion to $4 billion, according to analysts at Lagos-based investment bank Chapel Hill Securities Ltd.

There may be “higher volatility until the market becomes more functional, “Samir Gadio, head of Africa strategy at Standard Chartered in London, said in an e-mailed response to questions. “Foreign investors will need to be convinced that the new foreign-exchange platform is sustainable before they resume the purchase of local assets.”

The Central Bank of Nigeria used capital controls to stem an outflow of dollars after the naira crashed to a then-record in February 2015 as oil prices slumped. While stabilizing the currency, the controls deterred foreign investors and starved manufacturers of foreign currency needed to pay for raw materials and equipment. Nigeria’s gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to an almost six-year high of 15.6 percent in May.

Fair Value
Few trades went through in the hour or so after the market opened, making it hard to tell what the naira’s fair value is, according to Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. The central bank seems to want to stabilize the currency at around 250-260 per dollar and most local banks will be nervous about pushing through trades much weaker than that, he said.

While allowing the naira’s exchange rate to be “market-driven,” the central bank would intervene when necessary, Governor Godwin Emefiele said when he announced the new system on June 15.

“I think it will move to 300 at some stage,” Thompson said by phone. “There’s all that pent-up demand. But you don’t want to be seen by the central bank to be pushing it lower. It won’t sit well. There’s a bit of moral suasion to keep it here. But as the client orders come through, the banks will have to pay up to supply their clients.”

Forwards markets suggest the depreciation has much further to go. Three-month naira non-deliverable forward contracts rose 0.3 percent to 321 against the dollar, while one-year contracts climbed 0.6 percent to 356, heading for a record close.

Source: Bloomberg Business News