Naira to weaken further as forwards market declines
The naira is expected to weaken further in the forwards market despite measures implemented by the Federal Government to mitigate the situation.
According to a Bloomberg report, six-month contracts declined to their lowest level since September last week as crude oil advanced by 20 per cent after the Organisation of Petroleum Exporting Countries agreed to a production cut in November.
A drop in forwards would typically be a sign of growing confidence in a nation’s economy and currency, but not this time.
Even as oil prices advanced, Standard Chartered Plc and London-based Duet Asset Management said the country needed to devalue the naira and loosen capital controls.
With dollars becoming scarce and the economy on the brink of its first full-year recession since 1991, companies are being forced into the black market. There, each dollar costs N493, almost 60 per cent more than the official rate.
“Oil rise isn’t enough to eliminate the need for a change,” the Chief Investment Officer of Duet, Mr. Ayodele Salami, who oversees around $450m of African stocks at the company, said.
He said Nigeria would not attract inflows until it weakened its currency.
The naira has plummeted by almost 40 per cent since the Central Bank of Nigeria Governor, Godwin Emefiele, ended a 15-month naira peg to the dollar.
President Muhammadu Buhari, who likened the devaluation to “murder” in the past, said in a speech on December 30 that he was still against floating the currency.
“Eventually, they’ll have to revert to a more flexible currency regime,” the London-based Head of Africa Strategy at Standard Chartered, Samir Gadio, said.
Gadio, who had predicted that the official exchange rate would be steady for the first half of this year, said, “But for the time being, there’s no indication from policymakers that this will happen.”
Forward contracts maturing in one month rose by 0.1 per cent to 318.75 per dollar as of 1:54pm in London, narrowing their spread over the official spot rate of 314.25 to N4.5 from N34 in October. Six-month contracts traded at 363.5, suggesting the naira would depreciate by 14 per cent in that time.
The naira closed flat at 493 against the dollar at the parallel market on Monday.
The local unit had fallen against the dollar at the parallel market on Friday to 493, from 490 on Thursday as increased dollar demand weighed on the market.
Forex traders said the local unit plummeted following an increased demand for the dollar and other hard currencies by parents seeking to pay school fees of wards studying overseas.
“In the week ahead, we expect pressure on the naira to linger, especially at the parallel market, as unmet demand from the official market continues to stoke imbalances,” United Capital had said in a research note to clients last Tuesday.
Economic and financial experts have expressed divergent views over the outlook of the naira this year.
The naira beat analysts’ expectation and closed the year 2016 at 490 against the dollar at the parallel market.