London, UK | – Nigeria’s efforts to prop up its currency months before presidential elections are being undone by the slide in oil prices.
The naira tumbled to within 0.3 percent of a record low as Brent crude fell to the lowest level in more than four years. While some of the world’s biggest banks say the collapse in oil is just about over, further losses would force Africa’s largest producer to choose between raising interest rates, eroding foreign-exchange reserves or, eventually, devaluing the currency, according to Exotix Ltd., a London-based investment bank.
“We’re getting close to the point where the alarm bells are ringing loudly,” Angus Downie, the head of economics research at Ecobank Transnational Inc. in London, said by e-mail yesterday. “If oil prices continue to slide before the election, foreign-exchange reserves will come under pressure, and that’s when the authorities would be expected to adapt fiscal and monetary policy to the new oil-price regime.”
A weaker currency would boost the cost of importing everything from fuel to food, threatening support for President Goodluck Jonathan, who’s already under pressure for failing to stem deadly attacks by Islamist militants. Nigeria joins Russia, Colombia and Venezuela as the biggest losers from the decline in oil, according to Neil Shearing, the chief emerging -markets economist at Capital Economics Ltd. in London.
Nigeria is the continent’s biggest producer of crude, which accounts for about 80 percent of government revenue. The country also imports about 70 percent of its fuel needs because of inadequate refining capacity.
The Central Bank of Nigeria has supported the naira since mid-September by using its reserves to sell dollars outside of twice-weekly auctions, according to Standard Chartered Plc. At those auctions, it offers the local currency at a price of 155 per dollar, plus or minus 3 percent.
Calls made to the office and mobile phone of Ibrahim Mu’azu, a spokesman for the Abuja-based central bank, didn’t connect.
The naira is weaker than that in the open interbank market. It fell to 165.83 per dollar on Oct. 13, the lowest level since it reached a record 168.9 on Feb. 20. The currency dropped 0.1 percent to 165.43 per dollar as of 11:27 a.m. in Lagos, the lowest level on a closing basis since Feb. 25.
While the intervention helped prevent the currency from being among the worst performers in emerging markets this year, reserves are starting to erode, falling to $39.3 billion last week from almost $39.7 billion in early September.
The naira has weakened 3 percent versus the dollar in 2014, headed for its biggest loss since 2011. That compares with declines of 23 percent for Argentina’s devalued peso, 20 percent for Russia’s ruble and 4.5 percent for the South African rand.
Brent crude for December delivery has fallen 26 percent since reaching a peak in June, and settled at $85.40 yesterday. It dropped to $82.93 on Oct. 16, the lowest since May 2010. Bank of America Corp. and BNP Paribas SA predict prices will hold above $80 a barrel.
Nigeria’s monetary authorities will be monitoring oil prices closely in coming weeks, Ronak Gadhia, an analyst at Exotix in London, said by phone yesterday.
“The central bank is going to have to make a judgment on whether the price drop is temporary or if this is a more permanent issue that makes it respond with some policy measures,” Gadhia said. “The ideal scenario would be to devalue the currency. But in an election year that might not be palatable.”
Jonathan, 56, hasn’t said whether he’ll run in February’s elections. He’s faced criticism from the opposition for failing to check corruption, carry out promised economic reforms and contain a five-year insurgency in the country’s north by the Islamist Boko Haram group.
The president is a member of the People’s Democratic Party, which has won every general election since Africa’s most populous nation ended more than 15 years of military rule in 1999. The World Health Organization yesterday declared Nigeria Ebola-free, saying the nation’s success is a blueprint for other developing countries at risk of the disease.
Nigeria’s central bank has also supported the naira by keeping its benchmark interest rate at a record-high 12 percent since October 2011 and increasing the cash-reserve requirement for public companies’ bank deposits. Extending the measures risks hurting consumption and growth.
“The first choice for the central bank would be to tighten further and use up some of the reserves to keep the currency level,” while devaluation would be “a last resort,” said Gadhia.
Nigeria’s foreign-currency reserves, which were as high as $48.9 billion in May 2013, have fallen almost 10 percent this year as authorities used the money to bolster the naira.
While oil revenues are under pressure, Nigeria is still running a trade surplus, aiding reserves, Chris Becker, the lead macroeconomic and equity strategist at African Alliance Securities, said by phone from Johannesburg yesterday. The effects on the economy mean Nigeria is unlikely to raise interest rates or devalue the naira, he said.
“They have a lot of runway to defend the currency,” Becker said. “That’s what they’ll keep doing for now.”