Nigerian officials are increasingly confident the naira’s troubles are over for good. Some investors, however, disagree.
According to Bloomberg, portfolio inflows have risen in the past three months with crude prices increasing above $60 a barrel and money managers taking heart from a new foreign-exchange trading window, in which the naira has converged with the black-market rate.
That prompted Central Bank of Nigeria Governor, Godwin Emefiele, and the Director-General of the Debt Management Office, Patience Oniha, to tell investors in London on October 27 that the currency was set to strengthen.
The Minister of Finance, Kemi Adeosun concurred, saying on November 2 that the Federal Government saw no significant exchange-rate risk as it prepared to raise $5.5bn of Eurobonds.
Experts, however, said that Nigeria’s system of capital controls, multiple exchange rates and the trading window known as Nafex would struggle to survive a drop in oil revenue or sentiment turning against emerging markets.
The Sentiment is expected to come as the United States Federal Reserve raises interest rates, according to investors including Ashmore Group Plc and Standard Life Aberdeen Plc.
“At the moment, it’s easy for them to manage the current system and muddle through,” the Managing Director of TCW Group in Los Angeles, which oversees $200bn and recently started buying naira debt again after pulling out during the 2014 oil crash, Brett Rowley, said.
“That could change if we got a significant drop in crude production or prices. It’s not clear how Nigerian officials would react. That would be a key test to reassure investors they can get their money out even in times of stress,” Rowley added.
Yield-starved global investors have piled billions of dollars back into the country in the second half of this year, attracted by the naira’s devaluation after the Nafex window opened in April and yields on one-year Treasury bills of above 21 per cent for most of the year.
Foreign holdings of Nigerian government debt may have more than doubled from around five percent a year ago, according to Standard Chartered Plc.
That has helped the naira to appreciate by two per cent since August to 360.25 per dollar, trimming its loss in 2017 to 12 per cent.
The yield on one-year T-bills has dropped around 400 basis points in two months to 18.2 per cent, still among the highest in major emerging markets tracked by Bloomberg.
For now, Nigeria’s benefiting from a bullish oil market and rampant demand for developing-nation assets. Crude prices have increased 39 per cent since June as OPEC members including Saudi Arabia push for output cuts to continue in 2018.
And production in Nigeria, which is exempt from the curbs, has risen 15 per cent this year to 1.7 million barrels a day as militants ceased bombing export terminals and pipelines. Foreign reserves stood $34bn on October 30, the highest in almost three years.
But a drop in Brent crude to around $50 a barrel would probably be enough to push Nigeria’s current account back into deficit, according to Bank of America, which sees the naira falling to 432 per dollar by the end of 2018.
