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Nigeria: New Central Bank Governor May Devalue Naira - Renaissance Capital

Photo: World Finance
Zenith Bank CEO and newly appointed Nigerian Central Bank Governor Godwin Emefiele.

RenCap said this before Mr. Sanusi's suspension on Thursday morning

Renaissance Capital, an investment Bank has said the new Central Bank Governor, expected to take over on permanent basis from Lamido Sanusi, may devalue the Naira.

In its risk case scenario, the firm said "Although our base case is for no devaluation in 2014, there is a risk that the new Central Bank governor may devalue the naira, as Kazakhstan's new central bank governor did in February 2009."

According to the firm, like Kazakhstan, Nigeria's local currency has come under pressure recently from the US Federal Reserve's tapering policy, and its current account surplus is likely to decline as imports rise in the run up to the February 2014 elections.

"However, we think Foreign Exchange (Forex) reserves would have to drop significantly for the new Central Bank governor to devalue the naira. The last time the Central Bank devalued the naira was Year End 2011 (YE11), following the $11bn drop in Forex reserves in 2011. We forecast an $8bn decline in Nigeria's Forex reserves to $35bn at YE14. If, however, FX reserves fall to $30bn, ceteris paribus, our naira econometric model forecasts a sharper depreciation to N168/$1 at YE14 (our base case YE13 forecast is N164/$1). In this scenario, we think the new Central Bank governor may be compelled to adjust the naira exchange rate band to N160-170/$1, from N150-160/$1 now," the firm said.

The firm highlighted that Forex reserves have fallen $7 billion since their post-global crisis peak of $49 billion in April 2013.

"We believe they will likely fall further in 2014 on the back of subpar oil production and higher imports due to election-related spending. We think the cumulative deterioration in Nigeria's external position in 2013 and 2014 implies devaluation in 2015, after the elections; a devaluation before the elections would be unpopular for an import-dependent nation. We think a N160-170/$1 target range is likely. One upside for the government from a weaker naira would be more naira from dollar oil tax revenue" Renaissance Capital said in its outlook on the nation's foreign exchange.

Last week, Renaissance Capital hosted nearly 200 investors at its Fifth Pan-Africa Investor conference in Lagos, Nigeria.

Mr. Sanusi, who spoke to investors at the conference last week Monday, focused on investors' concerns about the naira. The next morning, Kazakhstan, a contiguous transcontinental country in Central Asia, the world's largest landlocked country by land area and the ninth largest country in the world, surprised the markets with a-20 per cent devaluation.

According to Renaissance Capital, investors compare Nigeria with Kazakhstan because they are both big oil exporters and their currencies have followed similar trajectories in recent years. Most notably, both countries' central banks devalued their currencies within 10 weeks of each other in 2008-09; Kazakhstan actually devalued its currency after Nigeria. The plummeting oil price triggered both devaluations.

"The governor sees no obvious advantage for Nigeria from a naira devaluation. He highlighted his hawkish stance when sharing with us his that he voted for an increase in the cash reserve ratio (CRR) on private sector deposits at the January monetary policy committee (MPC) meeting; however, he was outvoted by other MPC members".

"A CRR hike at the March MPC is a real possibility. This stance is contrary to a central bank that may be considering a weaker naira" RenCap added.

There has been increased currency pressure since the removal of the limit on dollar sales to Bureau de Changes' (BDCs) in 2013, according to Bismarck Rewane, Finance analyst and Managing Director, Financial Derivatives Company, FDC.

"The impact was a sharp depreciation in the naira from N162-176/$ at the parallel market. In the informal market where retail trade inventory is mainly financed by dollars sourced in the parallel market, the prices of goods is directly linked to the value of the naira in the parallel market. In December, some traders had slowly started re-pricing their inventory based on a weaker naira. The effect of this re-pricing was not apparent because of the seasonal Christmas price increases," he said.

According to him, furthermore, a depreciating naira and depleting external reserves will have a negative impact on the non-food basket.

"The Central Bank Governor has already expressed concerns on the depleting external reserves and has reiterated his determination to defend the naira. However, if the depletion in external reserves continues, an adjustment in exchange rate becomes inevitable. The question on everyone's lips is when and by how much the currency will depreciate especially at a time when the parallel market rate has appreciated from N176/$ to N170/$ and the interbank exchange rate has moved in the opposite direction to N167/$," he said.

He said the MPC will meet March 17/18 or even earlier if an emergency meeting is called, to review its current monetary policy stance, adding that all indicators are that the markets are in for a bumpy ride in February and March.

"Currency will remain stable in quarter two (Q2) until Mr. Sanusi leaves," he said, adding that political considerations are likely to outweigh economic credentials of the new Central Bank Governor.

Editor's Note: The RenCap report and all content of this story were done before the suspension of Mr. Sanusi as CBN Governor by President Goodluck Jonathan on Thursday morning.

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