JPMorgan said it expected Nigeria to devalue its currency by around 10% against the dollar by the end of June after a sharp oil price tumble ramped up the pressure on Africa’s top oil exporter.
The central bank did not immediately respond to a request for comment on the report, which predicted an even bigger move if oil prices fell below the $30-40 range. When oil prices plunged in 2014, Nigeria opted to defended its currency peg and restricted FX supply over adjusting the exchange rate.
Nigeria is one of a shrinking number of emerging market countries which has stuck to a more rigid currency regime, putting a strain on its dollar supply and central bank reserves; others such Angola or Venezuela have loosened their grip to allow for economic adjustments through their exchange rates.
JPMorgan’s Ayomide Mejabi wrote in a note to clients that he expected the Central Bank of Nigeria would react differently this time round compared to the 2014-2016 oil price shock.
“In our view, the CBN probably will not repeat mistakes made during the 2014-2017 FX crisis, when it reacted to the sharp oil price decline by restricting FX supply, and defending an exchange rate peg,” Mejabi wrote.
“This time around we expect the central bank to allow a modest FX adjustment, in the hope that it will be sufficient to stop portfolio outflows.”
Mejabi said he expected the central bank to devalue the naira NGN= by around 10% to 400 to the U.S. dollar by the end of the second quarter compared to 366.3 currently with declining FX reserves already at levels last seen in the early stages of the 2014 oil price collapse adding to the momentum.
This scenario was based on oil prices remaining in a $30-40 per barrel range over the next six months, with a potential fall of crude prices to $20-30 per barrel raising the probability of a larger devaluation, JPMorgan said.
Other analysts were more doubtful that Nigeria would be quick to adjust the currency.
Nigerian stocks extended losses for a fourth session on Wednesday, sinking to a more than four-year low.
Data in February showed that Nigeria’s foreign exchange reserves slipped by more than $1.6 billion to $36.38 billion.
“With non-resident holding of domestic debt estimated at around $8.0 billion and amid expectations of accelerated outflows in coming weeks, FX reserves could fall to around US$30bn fairly quickly,” Mejabi predicted
BUSINESS DAY