Naira Adjustment Likely as Crude Oil Stays Below $50

As the oil prices at the global market continues to rise and fall, there are strong indications that the Naira will soon be adjusted if oil price stays below $50 per barrel through October, Researchers at the Financial Derivatives Company (FDC) has predicted.

This is coming on the heels of predictions of Goldman Sachs Group Incorporated which predicted that oil will probably continue to decline to as low as $30. Specifically, the Gary Cohn President of Goldman Sachs said “we are probably in a lower, longer view”

Similarly, Musvwi Mahashi, a Barclays analyst, said that oil could fall to as low as $30 because supply surpluses won’t disappear overnight. The recent surge in oil process is just a “head take” and oil as cheap as $20 a barrel may soon be on the way, said citigroup

In 2015, the average price is likely to be anywhere from $35 – $80 according to a Bloomberg intelligence survey of 86 investment specialists while the head of OPEC, Secretary General Adbeli El-Badari insists that oil has potential reach $200. This is a pretty big range. Although Citi group had had to reduce its annual forecast for Brent crude for the second time in 2015, prices in $45-$55 range are unsustainable and will trigger “divestment from oil and a fourth quarter rebound of $75 a barrel, according to a report quoted by Citi.

Oil prices had since been lower than $50 per barrel for 6 out of the 7 weeks posting Nigeria’s external reserves down to $30.37 billion.FDC predicts that as soon as President Buhari assumes office forex demand will soon spike.
Although the interbank foreign exchange market (IFEM) and the IATA exchange rates are relatively stable at N200/$ and N199.08/$. FDC said the Naira depreciated 2.05percent at the parallel market to N225/$ last week while transfer dollars went down to $235/$.

Consequently, it averred that exchange rate differential has widened to N24.42 from N20.03 in August, with divine consequences to the nation’s trade balance as it down from a high of $44billion to less than $6billion. This depletion has been attributed to falling oil revenues and sticky import dependence.

Indeed, Naira continues to be under pressure. Expectations that the monetary policy committee (MPC) will adjust the Naira exchange rates were dashed as the fair value of the Naira was the concern of the committee.
The Central Bank of Nigeria has continued to use administrative measures to manage the Naira.

Although dearth of oil revenue has limited the CBN’s ability to prop up the Naira, the Central Bank Governor,Godwin Emefiele resisted all pressures from within and outside Nigeria to devalue the Naira.
In response to the terse demand, Emefiele imposed foreign exchange restrictions on imports at the risk of growth as retailers and manufacturers struggle to source funds needed to run their businesses.

The lenders watchdog had restated the Central Bank’s need for an expanded mandate on monetary policy.
Rather than capitulate to critics scathing assessment of his 14 months governorship of CBN, Emefiele wants the bank to play a more developmental role, in the form of job creation and reconciliation of loans to the manufacturing industries.

It would be recalled that over the years, the apex bank had built up credibility for reforming, inflation targeting and a reputation as one of the more orthodox Central Banks in the continent, Africa.

When he assumed office on June 3, 2014, Emefiele pledged that he would lower interest rates to ward off the clamour for devaluation. But in the last six months, he had raised the benchmark rate to about 13 percent and lowered the Naira peg by 8.4 percent to a midpoint of 168 per dollar.

In February, however, the chief regulator scrapped the peg but oil process have slided to below $50 a barrel compounded with internal debts in the form of unpaid salaries the pressure for devaluation of the Naira mounted.
JP Morgan Group which had placed Nigeria on an index watch as a result of their concerns in the operations of foreign exchange claimed the market is vitiated by lack of transparency in the determination of exchange rate and lack of fully functional two way foreign exchange market. Emefiele warded off those attacks.

The dust raised by his blockage of the use of official currency channels to pay for about 41 categories of import, including textiles, steel products and furniture is yet to settle as the manufacturers Association of Nigeria and Lagos chamber of commerce and NACCIMA, are still fighting to get the governor remove certain categories which are said to be raw materials for already thriving industries.

Hitherto, the interbank rates in the country had averaged 19.2 percent in 2015, compared with 12 – 13 percent average in the last two years.

This year so far, the interbank rates have been not only high but also volatile. Sometimes exceeding 100 percent intraday. This stemmed from tight monetary policy until last MPC meeting. He increased the cash reserve ratio (CRR) harmonization to 31percent in May, 2015, led to an additional debit of about N142billion across the sector. Renaissance Capital believed that the computation of CRR was punitive. Rather it increases the balance only increases and never reduces irrespective of changes to absolute deposits or to the mix.

Researchers at Renaissance Capital argued that now that JP Morgan has removed Nigeria from the EM bond , there was even less reason/urgency for the CBN to allow the naira to depreciate, and to relax the FX restrictions.
“We actually think the removal of Nigeria from the JP Morgan bond index pushes out the prospect of devaluation, as the threat of being removed from the index has come to pass. We think this means the risk has fallen of the MPC allowing for a more flexible naira (depreciation) at the next meeting, scheduled for 22 September. However, we still believe the CBN will allow the naira to depreciate before YE15, given how low the oil price is and eroding FX reserves.”

The risk is we may see further FX restrictions being imposed in the near term, given that Nigeria lost about $2bn of capital at a time when the CBN is avidly trying to conserve reserves. “FX restrictions that have already been imposed include:

Capping the amount FX can be sold for. Banks can only see dollars at a 50 kobo spread; Capping international ATM withdrawals using local currency debit cards at $300/day, and some banks have also capped POS and online payments to $300-1,000/day. Others are banning banks from lending FX to companies that do not generate FX revenues and FX demand from foreign investors, traders, etc. is not being fully met by the CBN.

As local businesses have struggled to access sufficient FX from the CBN all through the year, banks had had to use their international FX balances with correspondence banks to settle crystallizing LC obligations on behalf of customers”. And customers struggling to access FX to import the next round of raw materials or supplies to keep their businesses running were the reason that Emefiele talked about the country going into a recession.
Again the implementation of the Treasury Single Account (TSA) requiring all revenue due to the Federal Government on its Ministries, Departments and Agencies to be paid into the TSA or designated accounts operated and maintained at the CBN.

In early August, the regulator also required banks to provide Naira for their customers’ FX purchase 48 hours in the advance of the regulator’s FX intervention. Considering the tight liquidity position in the markets, this regulation put considerable pressure on interbank rates.

Furthermore, CBN increased the cut off rate during its periodic open market operations (OMO) to 14 percent from 13.7 percent rates, signaling lighter rates. CBN was also more aggressive in mopping up liquidity using OMO.
However, at the last MPC meeting, the CBN maintained the benchmark rate but reduced the CRR to 25 percent from 31 while retaining the 13 percent benchmark. But with crude oil prices still plunging, it is a matter of time before Emefiele gives in to the pressures the secure the actual value of the naira.