Nigeria May Devalue Naira Due To Oil Plunge

The plunge in oil prices may force Nigeria to devalue the naira as dwindling export revenues deplete foreign-exchange reserves, curbing the central bank’s ability to support the currency, Societe Generale SA warned on Monday, reports Bloomberg.

The central bank’s reserves have decreased by 20% in the past two years to the lowest since November 2017, and may soon reach the $30 billion threshold set by Governor Godwin Emefiele for the country to consider a devaluation, Jason Daw and Phoenix Kalen, strategists at Paris-based SocGen, wrote in note on Monday. The central bank may start adjusting currency policy before it reaches that point, they said.

Naira fundamentals are on an unsustainable trajectory and under current external conditions, especially lower oil prices, the risk of a devaluation is “very elevated,” the SocGen strategists wrote. “The combination of a current-account deficit — previously due to strong imports but now being compounded by weak exports — portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira.” 

Yields on Nigeria’s 2049 Eurobonds climbed 143 basis points to 10.18% on Monday, the highest on record, while the naira weakened 1.1% in offshore trading. The country’s benchmark stock index slumped to the lowest level in almost three years. 

President Muhammadu Buhari signed the country’s N10.6 trillion spending plan into law this year based on a crude price projection of $57 a barrel and targeted oil earnings of N2.64 trillion. Brent crude prices have plummeted about 45% this year to around $36 a barrel. 

“An initial attempt at a managed depreciation is more likely than a one-off large devaluation (like in the past), but it might be challenging to maintain over the medium term unless bolder policy action is taken,” Daw and Kalen wrote. 

The central bank could also consider tightening liquidity in the interbank market or by tightening policy, while a planned Eurobond sale could help rebuild currency reserves, they said. 

Credit - Bloomberg