Anxiety is rising in business circles in Nigeria following last week’s sudden depreciation of the Naira and leading business people are wondering if the drop signaled a change in Central Bank position on the local currency.
The Naira reached an all-year low on November 27 at N120 to the dollar in what Renaissance Capital called speculative trading even though it says a Naira crisis does not seem to be around the corner.
The Naira had opened higher at N118.5 that morning but depreciated to N120 to the dollar before retreating to N119.
Renaissance said in its report on the market at the weekend that the drop may have been “a reaction to the market’s perceived change to Central Bank of Nigeria’s policy stance with respect to defending a stable Naira.”
On the day in question, the CBN sold only $105 million at its auction and the market according to Renaissance “may have interpreted this to mean that the Central Bank will encourage some devaluation and look to preserve foreign reserves. Indications on the ground suggest that the currency could trade at N120 to the dollar by year end.”
A shift in the position of the CBN on the Naira will be significant in may ways, especially because an era of stable Naira and relatively easy access to foreign currency dominated credit in the past one year has expanded the exposure of Nigerian firms abroad.
Analysts say any drop in the value of the local currency will be devastating for these Nigerian businesses in the short to medium term.
The report by Renaissance speak of evidence of incremental pressure on the Naira in recent days, in an environment characterized by a limited supply of dollars and an excess of Naira due in part to inflows associated with budgetary allocations.
In its outlook for the Naira, Renaissance said while it expects the global credit crunch and drop in foreign capital inflows to impact the currency, it however, sees Naira crisis in the horizon.
According Samir Gadio, a Renaissance analyst, “in our view there have been no signs of a currency crisis. Furthermore, CBN figures indicate that foreign reserves rebounded to $60 billion on November 12 after dropping to $58.4 bn at the end of October.
“Consequently there is currently no dramatic downturn in reserves which remain well in excess of the $51.3 bn recorded in January 2008, even if we cannot discount the impact of falling oil prices in coming months.”
Nigeria’s current reserve level is the equivalent of about 15 months of import cover and coupled with proceeds of the Excess crude account of about $22.75 bn, should serve as a cushion against potential external and domestic shocks, Renaissance concluded.