What happens to the Naira after ‘the next few months’?
By Godwin Emefiele, the governor of the Central Bank of Nigeria (CBN) was recently at an event where he promised that the apex bank will continue to defend the Naira in the next few months. In the words of the CBN governor ‘the CBN is determined to maintain its stable exchange rate policy stance over the next few months given the relatively high level of reserves.’ The governor went on to emphasize the stand of the apex bank by stating that ‘sustaining a stable exchange rate is of overriding importance to us even as we continue to put measures in place to shore up reserves.’
What is clear from the governor’s position is that they are not going to allow the Naira to depreciate, at least ‘in the next few months.’ The CBN is also passing out an indirect warning to currency speculators that it is going to tap into its ‘buoyant’ reserves to stop any attempt to undermine the Naira by taking a position on a Naira depreciation.
The governor is responding to a recent pressure which has seen the Naira depreciate from its stable N360/N363 to the US$, where it has stayed for most of this year, to a low of N370, the lowest rate since August 2017. The fall has seen speculators already betting that the naira could fall further as oil prices continue to show signs of weakness in the international markets.
At a recent private discussion with about 10 senior executives of Nigerian companies, most of them had a negative outlook on the Naira. The consensus view was that the exchange rate of the Naira to the US$ would fall to about N400 to the US$ by the end of the first quarter of 2019. There was one or two divergent opinion. One person was of the opinion that the exchange rate would stay at N370 by first quarter of 2019 and another person believed it could fall as low as N500 or even lower.
This pessimistic view of the Naira is mainly driven by both developments in the global environment as well as uncertainties that is hanging over the Nigerian economy mainly due to policy inertia and the forthcoming 2019 elections. In the global environment, the main concern remains crude oil prices, which has dropped sharply since October from its high of US$81 to its current low of US$60s.
The inability of OPEC to reach a consensus on cutting production this week means that the outlook for crude oil prices is now even bleaker. For Nigeria, this is a familiar challenge. Oil accounts for 95 percent of export earnings and essentially the main contributor to the external reserves the CBN is relying on to maintain a stable exchange rate. A low oil price in the international market would severely weaken the capacity of the CBN to stand behind the Naira.
Already, there is noticeable pressure on the reserves. In October only, the CBN took out US$2.2 billion from the external reserves to defend the naira. The external reserve is down about US$6 billion since October to a current level of about US$41 billion. The expectation is that the CBN will report a higher reserve base at the end of November due to the inflows from the US$2.8 billion Eurobond issue it made in October. But the apex bank could burn most of that new dollar inflows by early 2019 as it is forced to increase its interventions in the foreign exchange market in a bid to prevent a sharp fall in the Naira.
By early 2019, based on current intervention trends, the external reserves could be below US$40 if oil prices remain at current levels. And that is where the concern really is. When the external reserves fall below US$40 billion, what happens to the Naira if oil prices fail to rebound to the highs of US$70 and above, which has been enjoyed for most of 2018? Are we likely to see a re-enactment of the 2016 foreign exchange management crisis that eventually saw the naira collapse from an exchange rate of about N199 to the US$ to almost N500 to a dollar?
The chances of another sharp depreciation of the Naira is real. It is most likely to happen after the 2019 elections and not before. The deduction from Emefiele’s statement shows that the apex bank will do all it can to prevent a collapse of the Naira before the election. His position may shift post-election, if oil prices fail to rebound following the depletion in external reserves.
But how investors react to the outcome of the 2019 elections could also have an impact on the exchange rates. If investors like the outcome of the elections in 2019 and open their books to make new investments in the country, a sharp fall in the Naira can be prevented. But if investors do not like the outcome of the elections, then they are unlikely to open their books to new investments. That will leave the CBN as the main supplier of foreign exchange into the market, leading to a further depletion in the external reserves and consequently a weaker Naira.
Emefiele, whose first tenure as CBN governor comes to an end around May/June 2019 would wish that he does not end his first tenure on a shaky Naira note. But that is unlikely to happen. Keeping the Naira stable and consequently avoiding another spike in inflation will occupy the last few months of his stay in Abuja. If he is given a second term, his main task will be to ensure that the naira does not collapse. Whether he will succeed at it depends largely on oil prices and also how investors interpret the outcome of the 2019 elections and the policies whoever wins in 2019 rolls out immediately. For now, future of the Naira is not really looking bright. The CBN has guaranteed a stable naira in the ‘next few months.’ Beyond that, the Naira is likely to find a ‘new level.’
Anthony Osae-Brown