Naira devaluation seen coming too little, too late

The Nigerian government may not devalue its currency enough to restore credibility in its economy, leaving potential investors stuck on the sidelines waiting for more, say analysts and investors. “If you believe the black market, the naira should be trading somewhere north of 300 [to the U.S. dollar],” said Mark Baker, EM fixed income investment director at Standard Life, which manages $1.4 billion in assets. That compared to 199 on June 7. The black market rate on June 7 was 361, according to Lagos-based AbokiFX.

“I would be surprised if they took those drastic steps. Maybe somewhere towards 250 would be more realistic,” said Baker.

The naira has been held at 197-199 to the dollar since March 2015, piling pressure on the economy as businesses are starved of dollars and foreign investment dries up. The May 24 announcement by Central Bank Governor Godwin Emefiele that there would be some “flexbility” introduced to the exchange rate was welcomed, though he had yet to detail the plan as of June 7.

The uncertainty has prompted speculation that the government does not know what to do. “The reason why we have seen a delay is they are trying to come up with a system that’s not going to allow a crazy amount of volatility right from the outset,” said Alan Cameron, chief economist at Exotix Partners. “They don’t want to be in a position where they are struggling to defend the naira at a much weaker rate.”

According to Exotix, a rate of 280/290 would restore some credibility in the economy. Naira non-deliverable forwards (NDF) suggest that the currency adjustment will be less than initially expected. After peaking at 269 on May 25, the one-month NDF fell to 238 on June 6. The three-month peaked at 291 on May 25, before falling to 278 on June 6.

Adding to pressure on the currency is a backlog of dollar demand as foreign companies seek to repatriate naira profits. “If you do not clear the backlog and just let the market set the exchange rate then it will overshoot aggressively,” said Investec portfolio manager Antoon de Klerk. He estimates $5 billion in pent-up demand for dollars.

A spokesman for the Nigerian central bank, Isaac Okorafor, said the announcement was for “more flexibility” and did no specifically mention a devaluation. “We will come up with a framework at the appropriate time,” he added.