16 July 2015, Lagos – The Central Bank of Nigeria will have to devalue the naira at some stage, possibly by more than 15 per cent, global ratings agency, Standard & Poor’s, has said.
Local and foreign investors have seen a devaluation of the naira as long overdue for Nigeria, which has been battered by the recent tumble in crude oil prices.
Following the naira devaluations in November and February, the CBN has recently focused on curbing access to foreign exchange at the interbank market for importers of some goods, introducing stringent restrictions three weeks ago.
But the Director, Sovereign Ratings, Standard & Poor’s, Ravi Bhatia, said the recent measures by the CBN including stopping the sale of forex to importers of 41 items at the official forex markets could only delay the inevitable, Reuters reported.
“Another devaluation is inevitable… they will have no option but to devalue,” said Bhatia at a media briefing.
Many investors are positioning for a devaluation of around 15 per cent. Bhatia said that sounded “reasonable”, though even more might be needed.
Non-deliverable forwards – derivatives used to hedge against future exchange rate moves – reflect expectations of currency weakening: six-month NDFs price the naira at 233 per dollar, some 18 per cent weaker than the CBN’s pegged rate of 196.95 on Tuesday.
On Wednesday, the naira hit another record low of 242.5 against the dollar on the parallel market operated by dealers in bureau de change, down 0.42 per cent from Tuesday.
The naira has been hitting record lows at the parallel market since the latest central bank measures introduced three weeks ago.
Bhatia did not expect the adjustment to be done in one go.
“I think at this stage the plan is to move in increments, not to do a ‘one big step’ devaluation like they would in the old days,” he said.
The central bank has said it is in no mood to devalue the naira, given the risks to inflation from a weaker currency, and that it will not be focusing on the thinly traded parallel market when determining the exchange rate.
Local and foreign investors have also been nervous that Nigeria may lose its place in the benchmark GBI-EM local currency debt index. Bhatia said this was a “real possibility”, although he expected the government to adjust policy enough to maintain its membership.
“At some point they have to decide: do they want to go with their policies or do they want to stay in, and at the moment they are trying to do both, and it has worked,” said Bhatia.
“But there are issues there, and it is a concern.”
JPMorgan warned in June it could eject Nigeria from its benchmark index by year-end unless it restored liquidity to currency markets in a way that allowed foreign investors to transact with minimal hurdles.
In March, Standard & Poor’s cut its rating on Nigeria to B+, changing its outlook to “stable”.