Naira value – sustainable appreciation?

There appears to be no consensus among sensible analysts as to the sustainability of the Naira rebound.

Let’s ignore the views of die hard CBN/Emefiele sycophants hoping to be rewarded with their own position in CBN in order to chop.

Lets instead assess the views of reliable independent analysts – a small gene pool.

On the one hand we have those who say the rebound is sustainable due to the resolution of issues in the Niger Delta releasing petrodollars back into the central bank.

This allows the CBN officials push dollars into the market to make the currency markets liquid thus removing the dollar scarcity issues that have so long driven the parallel market price.

Given the inability of CBN to meet demand at the official rate, the parallel rate is the only one that has mattered for business and individuals alike.

The fact that foreign external reserves have increased by $405m (over the past 30 days) during the period of CBN pumping dollars into the market, is testament to the sustainability of this policy.

On the other hand there are those who doubt the ability of the CBN to continue to release dollars in sufficient quantity on an ongoing basis to sustainably support the naira .

The waiver in the market price yesterday and a retrenchment to the downside on naira value is perhaps small evidence that supports this potential.

Amongst the arguments against longer term Naira recovery are:

  • The long term sustainability of the Delta peace
  • The ability of the CBN to meet higher and longer term demand and keep pumping dollars,
  • The loss of personal revenue for CBN officials created by the market rates discrepancy means individuals are motivated to keep the parallel rate high
  • The effect of local and international “shorters” who continue to bet on a low value naira and official depreciation  (through float or moving the official band).

This writer is uncertain as to the future…but thinks the next month or so will provide the key.

Businesses that have been starved of dollars and are desperate for foreign currency to import goods for their survival will start to be active in the market for dollars again.

This potentially huge pent up demand for dollars could drive a spike in demand (provided the companies in question are still able to borrow from banks to finance imports rather than being forced into insolvency by the last 18 months of currency starvation).

The current CBN supply is already under pressure as dollar auctions are over subscribed. If this pent up demand is released it appears unlikely to me that the CBN will be able to keep up.

Yesterday’s blip is perhaps a warning sign.

The IMF and others still make a free float (or at least a devaluation) a prerequisite for loans.

Large international business will only invest, so bringing dollars into the country, if the long term value of the naira is predictable.

For long term sustainability and to help manage the  national balance of payments deficit the FG needs both loans and foreign investment.

On these factors the shorters are still very much in evidence.

The pent up demand from importers will be the key.

If the domestic demand for goods is strong enough then dollar demand will spike and the naira will collapse again, this time for good.

This is by no means certain as the cause of the now official recession is far from clear (is it the oil price or the miss management of monetary policy).

The strength of recession could mean there is no pent up demand unleashed.

Add to this the much discussed Trump policy on Africa.

There appears to be none as the continent is largely immaterial to him (except for plans to irradiated ISIS driven jihad). What matters mainly to Nigeria about Trump’s strategy is oil price.

Given Trump’s ambitions to protect US trade and jobs you would have to bet on him rehabilitating domestic oil Sands production.

This additional US volume released into the international market will reduce oil price and therefore severely affect the value of the elastic naira.

All in all, a tough one to call – no matter what anyone says.

But I still tend to the downside of CBN not being able to support the Naira for long.

I will be much relieved if I have to wipe egg from my face over the next 18 months.

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