Lucky Fiakpa
8 December 2008
The Nigerian currency, the naira, had a bitter bite from the global financial crises last week when it slumped in value following scarcity of dollar at the foreign exchange markets.
The era of foreign exchange round tripping may just be knocking on the banking industry once again as the market witnessed acute shortage of dollars last week resulting in sharp drop of the naira.
The outlook is not rosy but the Central Bank of Nigeria (CBN) has promised to intervene in the foreign exchange market to ensure adequate supply of forex. Prof. Chukwuma Soludo, the CBN Governor, was quoted as saying that, "CBN would meet all the demand at the market determined rate" and forex end users and banks should not panic.
The naira continued on a freefall last Wednesday at the official market, the Wholesale Dutch Auction System (WDAS), losing N7 and trading at N127.5 to the Dollar, a development many believe was connected with the current global financial meltdown which has weakened oil demand in the US, Nigeria's major oil importer as well as the 2009 Appropriation Bill whose indices are not too encouraging. At the parallel market and bureau de change the rates performed even poorly, nose-diving to as low as N130 to the dollar.
Causes
The naira, which had recorded relative stability over the last three years, had shed N1.11 against the dollar at Monday trading, fuelling apprehension among major dealers and operators of a bleak next year amid a global financial meltdown. As against market demand of about $2 billion on Monday, only $100 million was made available at the Monday's WDAS session, leaving banks to source for dollars from other areas thereby exerting downward pressure on the naira.
On Wednesday, authorised dealers said the CBN sold only $180 million while demand was said to be about 10 times higher, forcing the naira to fall further. There will be no auction this Monday because of the Eid el Kabir holidays.
Dealers at NIFEX said banks refused to quote any spreads to avoid settlement defaults, as there were no dollars to trade, which heightening fears that the Federal Government might have taken a decision to allow the naira fall to save the dollar due to a weakening of the nation's fiscal position as a result of falling oil prices.
Analysts attribute the depreciation of the naira to the continuous depletion in the nation's external reserve, which was triggered by the plummeting price of oil at the international market. Since the CBN was "applying three months forward rate (about $100 per barrel) and the price of oil has gone below $50 per barrel, the accretion (that is inflow and outflow) to reserve will definitely be lower".
They also maintained that "by the end of January, the situation may be worse because the nation is getting lower foreign exchange inflow than it bargained for". This is attributed to the slump of the naira to the lingering financial crisis, which is now taking its toll on Nigerian banks as they could not get enough dollars for their transactions with their foreign counterparts and now demand foreign exchange from the WDAS to meet their demands.
Besides, they said owing to the financial crisis, foreign direct investment is no longer flowing into the country as before and that some foreign investors have been divesting portions of their dollar investment in the economy. "The global financial crisis is also a factor.
There are no more FDI flowing in, people are divesting. Banks are now coming to WDAS for dollars and demands are increasing unlike before. Banks are not getting dollars from their foreign counterparts because of the financial crisis," they stated.
The decision of the CBN to rationalise sale of foreign exchange, according to market operators, was interpreted to mean that the CBN would encourage some devaluation and look to preserve foreign reserves.
In the past four months, CBN had become by far the largest supplier of foreign exchange in the domestic market, controlling almost 90 per cent of total supply as against 10 per cent in the first quarter of the year.
Other supply sources especially foreign direct and portfolio investments: home remittances (Western Union etc) have since dried up as a result of the global liquidity and credit crises. "Unfortunately, this dry up in supply is coming at a time when letters of credit established 120 days ago are now maturing and due to be paid especially when you consider that commodity prices were at their highest levels then.
"Given that the CBN is now rationalising the sale of dollars and is virtually impossible to restructure the maturing letters of credit with offshore counterparties due to the global crisis, banks then have to scramble for dollars thereby pushing up the prices," some analysts said.
Dealers said dollar demand was being driven by importers ahead of the Christmas trading season as well as foreign hedge funds and portfolio investors that have continued to recall their funds to meet exigencies occasioned by the global financial crisis.
The dollar outflows has also been fuelled by local banks, businesses and individuals, who are worried by the long-term impact of falling oil prices on Nigeria's economy and the strength of its currency, and who are now taking dollar positions.
The Wholesale Dutch Auction System, WDAS, which holds twice a week, is moderated by the CBN as the official market where forex end users bid for it through their banks. The WDAS was introduced in February 2006 to bridge the gap between the official and parallel markets.
Oil Price Implication
The 2009 budget is benchmarked at crude oil price of $45 per barrel. But the price slipped to $46 per barrel (pb) last week on the international market, and there are fears it could drop to $30 pb by the first quarter of next year.
Oil prices remained near three-year lows as the slowdown in United States and Chinese economies continues to hurt demand for crude, especially in the U.S. which serves as the major oil market for Nigeria.
There are genuine reasons and concerns why the Naira may struggle to hold up next year. The deficit announced in the budget leaves considerable room for uncertainty. While the government announced a recall of $200 million from the Nigeria Trust Fund Account of the African Development Bank (ADB) and a bond issue of a Naira denominated $500 million, other aspects of the deficits are quite unclear, raising speculations as to the extent of borrowing.
The revenue expected from signature bonuses and proceeds from privatization are not clear and were not stated. As the government may have made projections based on certain parameters, it is likely that borrowing will be greater than expected if the projections are not met.
So as government deficits grow, so also do the growth risks in the economy and both signal a weakening of the naira.
But the greatest force against the strength of the Naira is the uncertainty of how low oil price will go and the implications it would have on balance of trade and the level of foreign reserves. It is thought that the greatest pressure on the naira will emanate from continuous worsening of the terms of trade and the threat to macroeconomic growth through debt and inflation.
But the Minister of State for Finance, Remi Babalola, believes all is not bad yet. He told journalists that of government strategy to deal with the problem. "We are also prepared to weather the storm if the price (oil price) falls below the benchmark. We have in stock strategic imperative to cushion the effect and protect the economy from downward slide.
"While it is virtually impossible to forecast oil price due to many unknown supply and demand variables, our benchmark is supported by logical and pragmatic bases.
"The objective of the budget is using oil resource as a shot in the arm, converting it into physical and financial assets to develop non-exhaustible resources.
"We are investing in productive public infrastructure in transportation, power, and others. We are investing in agriculture, human capital development, and export promotion," he said.
President Yar'Adua on Tuesday presented a N2.87 trillion deficit financing budget to the National Assembly, raising fears that next year will be very tough for Nigerians, especially with the projected N1.09 trillion deficit embedded in the budget. This was based on a budget benchmark of $45/bbl and production target of 2.292million bpd to finance the budget.
However, some analysts expressed doubts about government's ability to meet its revenue targets based on the expected crude production. They argued that even if the country has the capacity to meet the production target, OPEC quota may constraint it to a lower output unless it wants to go against the organisation's orders.
In a bid to shore up prices to a comfortable level that would aid additional investments OPEC embarked on output cuts, with another 2 million bpd cut expected during its December 17, meeting in Algeria.
OPEC at its quarterly meeting in Vienna, Austria, in September, had withdrawn 1.5million bpd, which had reduced Nigeria's output by 113,000, to bring our daily quota to 1.8million bpd. In other words,
Aside from the international issues, analysts argued that the unresolved issue of the Niger Delta could impede on the revenue and production targets, as more fields could be shut during the period.
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