The Current Oil-price and Depletion of Federal Reserves Contribute to Devaluation of the Naira

Foreign investors are exiting naira denominated assets as the twin spectre of a hit to oil companies and bank earnings and potential devaluation of the naira or depletion of reserves weigh on sentiment.

“There is a risk that the current oil-price weakness and deteriorating exchange rate outlook will translate into further foreign selling of Nigerian debt. Fixed income portfolio outflows have gathered pace over the past few weeks, probably reaching around $ 700-800mn since mid-October,” said Standard Chartered analysts led by Samir Gadio, Head of the banks Africa Strategy and FICC Research.

Foreign holdings of Nigerian debt fell to around $8.5bn in June ($ 4bn in T-bills and $4.5bn in bonds) from $ 11bn in December 2013, according to data from Standard Chartered.

A further $10bn worth of Nigerian equities is held by foreign investors, Standard Chartered says.

Nigerian equities have lost N2.3 trillion in market capitalisation since October 10, data compiled by BusinessDay show.

The CBN has attempted to stem the decline in the naira with recent policy changes.

The CBN on Thursday directed forex demand for the importation of finished goods, electronics, IT, Telecoms equipment, generators, and invisible transactions to the interbank market and away from the official window, which offers forex at a considerable lower rate.

The apex bank  also placed a cap on bank deposits that earn interest in the Standing Lending Facility at N7.5 billion.

This cap will result in banks diverting funds to Treasury bills, putting further downward pressure on yields and making the T- bills less attractive to foreign investors, analysts say, adding that a devaluation of the currency may be on the cards.

“Chronicling Nigeria’s macro-economic variables such as crude oil price, political events, security concerns in the North East, Foreign Portfolio Investors’ sentiment, amongst others, devaluation of the local currency is definitely imminent; the question is when it would be,” said Oladipupo Dauda, an analyst at Investment – One financial services Ltd.

“While it might be a tough call to take on devaluation barely three months to the general election, it seems it is the astute thing to do at this point in time, considering the haemorrhaging effect  uncertainty around the local currency forces on the financial markets…an adjustment in the FX band is much needed to bring some calm to the markets going into the November 25th meeting.”

Rising long – end bond yields (up by an average of 100-150bps from August lows) suggest that market players and investors are increasingly worried about the re-pricing of the curve likely to be triggered by pressure on the exchange rate, said Gadio.

“Given asymmetric risks to bond yields, there is little incentive to remain at the long end of the curve, considering the duration-compounded losses that are likely to materialise,” Gadio said.