Standard & Poor’s: Naira’s devaluation inevitable

From one of the world’s foremost ratings agencies, Standard & Poor’s, came yesterday a damning verdict on the naira, Nigeria’s legal tender: it cannot escape devaluation. It said despite the insistence of the Central Bank of Nigeria (CBN) that it was not considering such a move, the apex bank would have no choice but to devalue the naira, possibly by more than 15 per cent. It, however, said in a statement that the depreciation of the currency could be gradual.

The CBN has, in recent weeks, ignored calls from international investors that it should devalue the ailing naira after earlier devaluations in November and February.

It has instead responded by focusing on curbing access to the greenback on the official interbank market for importers of some goods. Only yesterday, President of the Association of Bureaux de Change Operators of Nigeria (ABCON), Mr. Aminu Gwadabe, said the CBN had fixed a spread at which BDC operators could resell dollars, which the regulator sells to them at not more than 3.5 per cent to its clearing rate. But those measures just delay the inevitable, said Director of Sovereign Ratings at Standard & Poor’s, Ravi Bhatia.

“Another devaluation is inevitable… they will have no option but to devalue,” a report yesterday by Reuters quoted Bhatia as saying at a media briefing in London.

According to him, many investors are positioning for a devaluation of around 15 per cent, which 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 N233 per dollar, some 18 per cent weaker than the Central Bank pegged rate of N196.95 on Tuesday.

Yesterday, the naira hit another record low of N242 against the dollar on the parallel market operated by dealers in BDCs, down 0.42 per cent from Tuesday. The naira has been hitting record lows on the parallel market since the Central Bank’s measures were 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 CBN 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.

Investors have also been nervous Nigeria might lose its place in the JP Morgan 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. But there are issues there, and it is a concern,” he said. Renaissance Capital, a leading investment banking firm originating from Russia that operates in high-opportunity emerging and frontier markets, a few days ago, put the shortfall in the forex market, which the CBN had not been able to meet at $4 billion.

Since June 24 when the markets started reacting to the CBN’s latest policy to restrict access to foreign exchange for certain categories of importers, the naira has declined against the dollar almost on a daily basis. Yvonne Mhango of Renaissance Capital had also predicted that the naira will weaken to between N220 and N230 by the end of the year. As at April, the CBN had spent $4.7 billion in defending the naira. Last February alone, it spent at least $3.4 billion in stabilising the exchange rate.