The House of Representatives Committee on banking and currency, has frowned at the devaluation of the local currency and increase in the Monetary Policy Rate (MPR), saying that the development would further suffocate budding businesses.
The Chairman of the House Committee, Chukwudi Jones Onyereri, said CBN’s decision should have been preceded by considerations of attendant hike in interest rates by banks.
According to him, the increment from 12 per cent to 13 per cent would be responded to by the financial institutions in a fierce manner such that interest rates would become higher urging CBN to think about placing a cap on rates as a matter of urgency.
Onyereri, who made the disclosure during the House of Representatives Committee on Banking and Currency’s oversight visit, in Lagos, on Tuesday, raised concern that some interventions of CBN may constitute a distraction, advised that the apex bank face projects that will directly impact on the lives of the people.
He said that part of the country’s challenge is misplaced priorities and policy directives that do not take into consideration the domestic factors.
In a swift reaction, the Central Bank of Nigeria (CBN) said the devaluation of the country’s currency was the best option to ensure that the economy sustains its activities.
Besides, the apex bank noted that a lot of things were working against the strength of the currency, especially the huge loss recorded in the ongoing cycle of falling oil prices.
The Deputy Governor, CBN, Adebayo Adelabu, said that the kind of defense required to keep the Naira afloat is no longer sustainable.
“The pressure on the Naira is from frivolous demand on foreign exchange and if we don’t devalue the currency now, it will continue to depreciate,” he said.
He assured that CBN was committed to ensuring single digit inflation and interest rates, noting that the institution is contributing to achieve the target as it embarked on the completion of 105 intervention and in-house projects.
Adelabu further said the apex bank is aware of the concerns raised by the committee and has been using persuasive approaches on banks, alongside other measures, to ensure that small businesses are supported.
Naira touches record low after official devaluation
Nigeria’s naira touched a record low against the dollar on Wednesday, a day after the central bank devalued the currency, complicating efforts to contain inflation before presidential elections early next year.
The naira fell to a record low of N178.85 to the dollar shortly after the market opened, but rebounded by around 1 percent to N176.35 after two oil companies sold dollars.
Nevertheless, dealers said that was still just below the new target band of 5 per cent either side of N168 to the dollar, announced by Governor Godwin Emefiele on Tuesday.
Analysts say failing to devalue would have been much worse. “The bold steps taken by the Central Bank will help tremendously to stem the drawdown in foreign exchange reserves,” South African-based NKC Research said in a note on Wednesday.
“Given the sharp depreciation of the interbank exchange rate in recent months ... the cost of imports would have increased even in the absence of an official devaluation.”
Foreign oil companies, which typically buy naira towards the end of the month to fund their Nigerian operations, helped the currency to recoup some of its losses on Wednesday. Total of France sold $20 million and Anglo-Dutch Shell an undisclosed amount, boosting dollar liquidity on the interbank market, dealers said.
Dealers also said there were expectations that the central bank would intervene to keep the naira within the band.
Investors have pulled huge sums out of many emerging economies since the U.S. Federal Reserve began rolling back a policy that kept yields on U.S. debt ultra low. Currencies from economies sensitive to oil prices such as the naira and the Russian rouble have been hardest hit. Angola’s kwanza hit a record low of 100.895 to the dollar on Wednesday.
Falls in the naira have spooked bond investors who had been wooed by Nigeria’s high yields. Africa’s top oil producer relies on crude revenues for 95 per cent of its foreign exchange.
The yield on Nigeria’s 2022 government bond rose 45 basis point to 14.25 per cent, reacting to the increase in the policy interest rate of 100 basis points to 13 percent on Tuesday.
Trading on the overnight lending market stopped, as banks awaited information from the central bank on when a rise in the level of cash reserves they have to keep would come into force.
Trading in the next few days will test whether financial markets believe the new target is realistic for a country contending with a 30 per cent fall in world oil prices since June as well as an Islamist insurgency in the northeast.
Economists welcomed Emefiele’s action as accepting the reality of the naira’s sliding value - in common with the currencies of other oil exporters such as Russia - in trading between commercial banks.
Analysts said the continued downward pressure on the naira threatens to stoke inflation by pushing up the cost of imports, on which Africa’s biggest economy relies for around 80 percent of its consumption.
Over the past two years Nigeria has enjoyed historically low inflation in single digits, a target the central bank is keen to keep meeting. A surge in living costs would be a headache for President Goodluck Jonathan less than three months before what is likely to be a closely fought presidential election.
Devaluation, a disincentive to speculators —Capital Bancorp
Analysts and dealers at Capital Bancorp Plc (CBP), a member of The Nigerian Stock Exchange, said the devaluation of the Naira is in order, and will discourage currency speculation.
According to the investment research company, it would make exchange rate “more expensive for currency speculators to bet against the Naira as the high interest rate would serve as disincentive for speculators, and hopefully this should translate to more stability of the Naira as the demand for dollar is moderated.”
There is also a potential inflationary pressure as a result of the devaluation in the exchange
rate, electioneering spending and rising consumer goods. Entities that are not able to pass the cost to consumers are bound to reduce production, record lower profitability and may consider reducing staff
strength as a measure to remain afloat.
The company in a research note to investors on Wednesday said that the outlook for the stock market will remain bearish, as flight to fixed income instruments may continue and the market may experience net outflow of Foreign Direct Investment (FDI).
Also, “because of the increase in interest rate, the prices of bonds are expected to come down and yields will go up, serving as an incentive to investors. “There may be some activities in the market as new bond issues would have to be issued at market rates in line with the current interest rate regime.
“We see more flight from the stock market to the bond market as investors seek less risky instruments,” CBP analysts stated.
It further expressed concern that the disposable income/ net income of Nigerians/ Corporate entities that may borrow at the prevailing interest rates will be reduced; adding that capital expenditure of governments is expected to be low unless the falling trend in the price of oil is abated.
‘Access Bank positioned to withstand devaluation’
Nigeria’s Access Bank does not expect to take a hit from the naira’s devaluation, because many of its customers are generating revenues in foreign currencies.
However, the devaluation will probably dampen foreign investor demand for Access Bank’s N68 billion ($385 million) rights issue.
Reuters quoted Group Managing Director/ Chief Executive of Access Bank, Mr. Herbert Wigwe, in an interview in Johannesburg as saying that falling oil prices would also lessen appetite for the issue from Nigeria’s fourth-largest lender.
Local investors are expected to help plug any hole and the bank still anticipates raising an “acceptable portion” of the total.
Nigeria’s central bank devalued the naira by 8 percent and raised interest rates by 100 basis points on Tuesday, hoping to stem foreign reserves losses from defending the currency against weaker oil prices.
“It is little or nothing in terms of the implications to my financials just because of where my lending is,” Wigwe said, noting that customers generating revenue in other currencies were less exposed to a weaker naira.
Domestic interest rates are likely to rise by 200 basis points and hurt lending to the manufacturing and trade business sectors, he said.
Wigwe said the bank had also been cleared of any wrongdoing after a Securities and Exchange Commission investigation into the freezing of its share price in September.
The Nigerian Stock Exchange suspended the shares for a week after Access Bank applied to the bourse arguing that information on its capital raising was not publicly available and that it wanted to avoid speculation in its shares.
Wigwe said Access, which has operations in nine countries and a representative office in China, was evaluating the business case for expansion into Mozambique, Kenya and Tanzania.
The bank expanded into retail operations after the acquisition of failed Intercontinental Bank, which gave it seven million customers. Wigwe said he hoped to have 25 million users signed on by 2017 to diversify funding.
Access shares are down 18 percent so far this year in line with the Nigerian index’s 16 percent decline.
Capital market, economy will suffer —Afrinvest
Devaluation of the naira and the series of adjustments at the last Monetary Policy Committee (MPC) meeting is expected to have direct impacts on inflation rate, the capital markets and the broader macro economy.
This was the position of a dealing member of the Nigerian Stock Exchange and an investment research company, Research at Afrinvest West Africa Limited.
According to analysts at Afrinvest the 8.4 per cent devaluation of the Naira from N155.00/$1.00 to N168.00/$1.00 at the official window is a bold move, but will result in investor losses at the Nigerian Stock Exchange (NSE).
“In the short term, we expect the spread between the interbank rate and the official rate to widen, while in the medium term, Foreign Portfolio Investors (FPI) will be faced with dilemma of selling off positions and taking losses in anticipation of further depreciation or patiently riding the curve back up.
“In our view we expect the former to take precedence as the selloffs will persist in trading sessions ahead in the fixed income and equity market,” said Afrinvest.
It said because of the sell off losses and the additional liquidity requirement of the banks to meet up with the new CRR requirement, yields in the fixed income market will increase.
“In the long term, the MPC’s decision to devalue the Naira by N13.0 will aid the convergence of exchange rate at all segments of the market,” it said.
Also, given the import-dependent nature of the Nigerian economy and the approximate 15 per cent contribution of imported goods to the Headline Inflation Index, “we anticipate, a mild increase in the November 2014 inflation rate,” said Afrinvest.
The company further said the CBN’s proactive and bold policy responses to these developing macroeconomic themes is commendable, but suggested that complimentary fiscal responses will be required to deliver structural depth in the economy.
“An equally bold and proactive fiscal side will be required to boost confidence within the economy and the market,” the analysts agreed.
Devaluation boosts equities market, increases investment
The Tuesday devaluation of the naira has improved activities in the capital market as key measurement indicators appreciated by 2.09 per cent on Wednesday.
According to data from the trading statistics of the Nigerian Stock Exchange(NSE), the Market Capitalisation of listed equities on the main board of the NSE rose by 2.09 per cent or N233.75 billion from Monday’s N11.18 trillion.
Also, the NSE All-Share index advanced by 708.03 points or 2.09 per cent; moving the index from the 33,000 basis points mark (where it fell to prior to the devaluation of the naira) to close at 34,583.29 points.
Reacting to this sudden recovery, a senior stockbroker with APT Securities, Mr. Tony Mordi, stated that the naira devaluation has allayed the fears of most foreign portfolio investors, which account for more than 60 per cent of the Nigerian Capital Market.
He added that the impact of the devaluation on the capital market is evident in the recent recovery witnessed in the capital market since the announcement was made.
He said: “The capital market was perceived negatively prior to the devaluation. The controlling party of the NSE is foreign portfolio investors. They left the market by dumping their shares in the equities market because of fear and uncertainty.”
“They resorted to flight for safety, which implies holding on to their money rather than investing it in the market.”
“The fears have been cleared. The dollar they have now will command more naira in their hands. We’ve seen the equities market going up,” he said.
Mordi noted that the devaluation of the naira has a positive impact on the capital market on the medium to long-term.
Nevertheless, he stated that there might be fluctuations in this trend as people shop for the yuletide, which might mean that they would have to sell their shares (profit taking) in order to have enough money to spend for the festivity.
He added that this action could trigger a downward trend in the market within the period.