Nigeria’s Naira Pulls Back From Record Low as Stocks Advance

LAGOS, Nigeria, Capital Markets in Africa: Nigeria’s naira gained on the second day of trading without a peg after the central bank spent more than $4 billion on Monday to clear pent-up demand for foreign currency. Stocks advanced and dollar-bond yields fell to 10-month lows.

The currency of Africa’s biggest economy strengthened 0.7 percent to 280.5 per dollar by 10:44 a.m. in Lagos, the commercial capital, after declining as much as 1.4 percent earlier to a record 286.50. It slumped 30 percent yesterday after the central bank abandoned its 16-month-old fix of 197-199 per dollar.

The central bank sold $532 million on the spot market and $3.49 billion on the forward market on Monday, Lagos-based foreign-exchange trading platform FMDQ OTC Securities Exchange said on its website. While the exchange rate for the forwards wasn’t disclosed, the dollars on the spot market were sold at a rate of 280 naira per dollar, according to a person who asked not to be identified as the information isn’t public.

“Given the quantum that was cleared at this point, this will probably be viewed as a positive result,” Samir Gadio, head of Africa strategy at Standard Chartered Plc in London, said in an e-mailed response to questions. “That said, the pressure on foreign-exchange reserves is only likely to be deferred in the forward market. The Central Bank of Nigeria will also remain the main provider of dollar liquidity in the spot market for the time being.”

Stocks Advance
Nigeria’s benchmark stock index climbed 0.4 percent, paring Monday’s 1.6 percent decline. Nestle Nigeria Plc led the advance, gaining 5 percent, while International Breweries Plc added 4.9 percent and Axa Mansard Insurance Plc rose 4.8 percent. Yields on the West African country’s $500 million bond due in July 2023 dropped one basis point to 7.09 percent, having fallen 9 basis points on Monday.

The central bank, which has seen its reserves fall to a more than 10-year low of $26.4 billion, will struggle to keep intervening on a large scale to defend the currency, according to UBS Wealth Management. Lagos-based investment bank Chapel Hill Denham Securities Limited had estimated that the backlog of demand was $3 billion to $4 billion.

“They can’t do this for months,” Jonas David, a Zurich-based emerging-markets analyst at UBS Wealth Management said Monday. “We could see further pressure on the naira” and it may depreciate to about 300 per dollar, he said.

Further Declines
Traders are betting the naira will further depreciate by more than 10 percent by September. Three-month naira non-deliverable forward contracts rose 1.6 percent to 325 against the dollar on Monday, a record on a closing basis, while one-year contracts climbed 1.4 percent to 359. They were trading lower at 324 and 354, respectively, on Tuesday.

Governor Godwin Emefiele said when he announced a float of the currency on June 15 that the monetary authority would intervene when necessary even though it was allowing the exchange rate to be “market-driven.”

The CBN introduced capital controls to stem an outflow of dollars after the naira crashed to a then-record of 206.32 in February 2015 as oil prices slumped. While stabilizing the naira, the controls deterred foreign investors and starved manufacturers of hard 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.

Source: Bloomberg Business News