Naira’s precarious nose-dive

The naira took a precarious nose-dive in the parallel market on Friday. Nigeria’s currency plunged from N360 to a record N370 to the dollar.  The naira has not traded that low since August 2017.

The event of last week in the parallel market might be a pointer to the things to happen in the remaining two months of political uncertainty leading to the general elections.

The forces against the naira are incredibly formidable and there are fears that it might depreciate further.  The Central Bank of Nigeria (CBN) has done a grueling battle in defence of the naira in the last 10 months. Between January and October 2018, the apex bank pumped a total of $10.97 billion into the foreign exchange market to shore up the naira.

That was possible because oil price was heading north in the international market. Now with the drastic change in the direction of oil price, there are fears that the CBN might not have the financial muscle to defend the naira the way it did in the last 18 months.

Donald Trump, America’s mercurial president has struck a deal with Saudi Arabia, the largest producer in the Organisation of Petroleum Exporting Countries (OPEC) cartel, for production hike that would bring down oil price considerable.  Saudi Arabia is in no position to reject Trump’s demand.  The Saudis are in a diplomatic and legal quagmire that makes it mandatory for its rulers to do sinister things to please Trump.

Jamal Kashoogi, a former insider in the Saudi royal family eventually turned against the monarchy and was harshly criticizing Crown Prince Mohammed Salman’s policies in his column in Washington Post. The prince is the de facto ruler of Saudi Arabia.

On October 2, 2018, Kashoogi went to the Saudi consulate in Istanbul, Turkey to obtain papers that would enable him marry his Turkish fiancé.  He was brutally murdered in the Saudi mission and his body reportedly dismembered.

The Saudis probably thought that with Turkish President Recep Tayipp Erdogan’s frosty relationship with the press, Turkey would ignore the murder of the Saudi-born journalist.  But Erdogan was the first to raise the alarm that eventually forced the palace in Riyadh to acknowledge the murder, though insisting that Crown Prince Salman had no hand in the obviously planned killing of the journalist.  Now even the Central Intelligence Agency (CIA), America’s Spy agency insists that all fingers in the brutal murder point in the direction of the crown prince.  Turkey believes that Salman ordered the brutal murder of Khashoggi.

While the whole world is angry with Saudi Arabia for the ruthless murder, Trump has apparently used that opportunity to blackmail Saudi Arabia into crashing the price of crude oil in the international market.  The price of crude has tumbled from $85 per barrel some weeks ago to an abysmally low rate of $59.64.

The Saudis may be gnashing their teeth but Trump is full of praise for their role in crashing oil price.  In exchange, the U.S. has maintained a curious silence over the murder of Khashoggi.  While the whole world is threatening the Saudis with everything from diplomatic sanctions to arms embargo, the U.S. has calmly traded punishment for the murder for cheap oil. Tumbling oil price is a key factor in last week’s poor showing of the naira in the parallel market.

Parallel market operators in Nigeria have returned to their dubious deal of hoarding hard currency in view of developments in the oil market.  The view in the parallel market is that with oil price heading south, the CBN would no longer have the capacity of funding the market the way it did in the last 18 months.  That apparently conjurred the massive depreciation of the naira in the parallel market last week.

Until the general elections enable investors to determine the direction of the economy, Nigeria would remain unattractive to foreign investments.

Another factor inhibiting foreign investment inflow and engendering the depreciation of the naira is the massive growth of the U.S. economy.  America’s economy is growing at a record 3.5 per cent.  The Federal Reserve Board, America’s central bank is worried that the economy might over-heat.  It is now drawing the breaks on growth through interest rates hike that makes the yield in U.S. debt instruments more attractive, thus reducing the yawning gap between American risk free debt instruments and Nigeria’s high risk debt instruments.

The improved yield in America’s debt instruments is partially responsible for the run on share prices in the Nigerian capital market.  The Nigerian Stock Exchange opened 2018 with market capitalisattion at N16.15 trillion.

At the close of business last week the NSE capitalization was a scant N11.2 trillion.  The market has lost N5 trillion to capital flight by foreign portfolio investors who are now moving to higher yields in developed markets.  No one expects the bulls to return to the NSE earlier than the end of the first quarter of 2019 when the elections would have decided the likely direction of the economy. Until then, the bears would reign supreme in the NSE.

Similarly, the naira would almost certainly take more pounding in the foreign exchange market.  The months to the general elections look pretty gloomy for Nigeria’s one-handed economy.

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