Nigeria to defend naira as stocks fall to drop in oil prices

November 07, 2014 | Economy, Nigeria

Lagos, Nigeria  | – Nigeria’s central bank has vowed to defend the naira, despite a drop in oil prices which has unnerved foreign investors and sent its stock and bond market into a tailspin, Deputy Governor Sarah Alade told Reuters on Friday.

Nigerian Central Bank Headquarters, Abuja

Nigerian Central Bank Headquarters, Abuja

Alade said the naira, which has dropped around 4 percent so far, has been trading outside its preferred band for some time, but the bank will continue to defend it. The bank sold dollars as part of that defence on Friday, she said.

The currency closed at 165.90 naira following the central bank’s intervention, after weakening to 173.05 naira intraday against the dollar. It closed at 169.90 naira on Thursday.

“We would continue to defend the currency, we have always said that,” Alade told Reuters by telephone, adding that the bank was comfortable with level of the country’s foreign reserves of around $38 billion.

The currency has come under pressure in the past two months from falling oil prices, which have weakened appetites for assets in Africa’s biggest economy and chief oil exporter.

Nigeria’s main stock index fell 11.52 percent in one week to 33,225 points as naira worries and oil-price risk spooked foreign investors, the major buyers of local shares.

Foreign investors have continued to pulled money out of the local stock and bond market since oil prices steadied at less than $83 a barrel, after dropping to a new four-year low below $82 a barrel on Wednesday.

Bond yields have also suffered. But domestic pension funds stepped in on Friday to pick up the slack and piled back into the most liquid 3-year government bond, driving down the yield 64 basis points to 11.70 percent.

Devaluation Risk

“The central bank cannot afford to keep intervening in the FX market, to defend the official target exchange rate … at the rate it has been doing in recent weeks … especially in a depressed oil price environment,” said Yvonne Mhango, an economist at Renaissance Capital.

Analysts expect a 10 to 15 percent devaluation of the currency, around half the scale of what the central bank did six years ago, when oil prices also plunged.

The naira has touched new intraday lows nearly every trading session on strong dollar demand, partly from foreign investors and partly from domestic importers worried about the risk of a currency devaluation.

Alade said the bank was willing to defend the naira and would be guided by the dictates of the market to do that, adding that the last time the currency was devalued, in 2008, oil prices were lower than they are now, even though the price is declining.

“At the last time when did that (devalued), we didn’t have the kind of oil prices that we have now, so we are still comfortable,” Alade said.

On Thursday, the central bank restricted the dollar sale to importers of telecoms equipment, power generators and finished products at its foreign exchange auction, funnelling demand towards the interbank market.

“The central bank’s actions are aimed at addressing naira pressures (but) … by transferring USD supply from (its auction) to the interbank market … the naira will come under further pressure at the interbank market owing to strong USD demand,” analysts at Ecobank said.