Naira Seen Tumbling, Weakens To 254 To The Dollar As Free Float Begins

Pent-up demand for dollars may push Nigeria’s naira at least 20 percent weaker when the central bank allows the currency of Africa’s biggest economy to float freely on Monday morning, said analysts including Renaissance Capital Ltd. and the head of Ecobank Transnational Inc.

Bloomberg reports that the Demand for foreign currency has built up to about $3 billion since capital controls were imposed 15 months ago to defend the currency’s peg of 197-199 per dollar, according to Chapel Hill Denham Securities Ltd. Even as the naira weakens, local stocks may extend the best three-day rally since April 2015 in anticipation of a return by foreign investors and as the risk of exclusion from global indexes fades. Banks may gain as the policy change allows them to profit from foreign-exchange volatility and boost trading income, analysts at Exotix Partners LLP said.

“We think the rate will be around 250 or 260 per dollar” when the naira starts trading on the interbank market, said Tajudeen Ibrahim, head of equity research at Lagos-based Chapel Hill Denham. The central bank will probably help clear demand by selling dollars, he said, moderating potential volatility.

Central bank Governor Godwin Emefiele announced the end of the currency fix on June 15, surprising analysts who had expected the oil producer to turn to a two-tiered system with tighter controls on the exchange rate. Nigeria has held the peg since March 2015, spending about $2.7 billion of its reserves, 9.3 percent of the total, this year alone, even as other oil exporters devalued their currencies as crude prices slumped by more than half since 2014.

Three-month non-deliverable naira forwards jumped to a record 333 per dollar on June 15 after Emefiele announced the changes. On the black market, dollars changed hands for 335 naira on Saturday, Lagos-based AbokiFX said on its website.

The naira could start trading at 260 per dollar, potentially weakening to 390 by year-end, before retracing, Renaissance said in a June 16 note.

‘Never Imagined’

“We never imagined a free-floating naira,” Johannesburg-based Renaissance analyst Yvonne Mhango said. “This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate.”

The naira could initially weaken beyond 300 to the dollar, before reaching “fair value” of 280 to 290, said Alan Cameron, London-based economist at Exotix.

Investment into Nigeria has shriveled as foreigners are deterred by capital controls, while local businesses have struggled to import raw materials and equipment. International carriers including United Airlines and Iberia have halted operations in the West African country, saying they couldn’t move revenue out.

“We see a lot of volatility from high dollar demand, because as of today, if you get 10 percent of your request, you’re lucky,’’ Olubunmi Asaolu, an analyst at Lagos-based FBN Quest said by phone. While the naira could stabilize at about 290 per dollar, any move toward 350 “will cause mayhem” and prompt the central bank to moderate the drop by supplying additional greenbacks.