Economy remains in panic mode over political uncertainties

• CBN stakes $400m, naira records all-time low of N206

Nigeria’s economy, which remained largely jolted last week on the backdrop of the postponement of the general elections, may face a spillover effect this week as speculations and policy directions remain unchanged.

  The financial market and the economy in general had last week experienced a distorted macroeconomic variables, as the All-Share Index of the equities market fell 4.2 per cent within the first three trading days of the week, while the naira closed at all-time low against the dollar.

   Shockingly, at the Interbank market, the naira-dollar exchange breached the N200 mark, which was utterly in disfavour of the local currency.

  Still, the move by the Presidency and the Central Bank of Nigeria (CBN), to switch off the panic mode, through assurance of continued democratic governance, sustainability of the government finances and the resilience of the economy could not stem the tide.

  Despite the application of the circuit breakers rule once the currency falls more than two per cent from previous close and the reassurance by the Central Bank Governor, Godwin Emefiele, the Naira fell further on Friday at the Interbank segment to close at N206/$- all time weakest close.

  Also, there were observed cautious approaches investors, as they remained wary of macroeconomic risks and political uncertainties and heightened by the Standards and Poor’s (S&P) Rating Agency’s placement of Nigeria’s Sovereign Credit Rating at BB-, a precursor to credit downgrade. 

 All the three government instruments at the Debt Management Office’s bond auction last week were not fully allotted as investors sought higher premiums as a compensation for risks.

  But Afrinvest Securities Limited, in its weekly reports, warned of further capital market volatility and sustained pressure on the currency. 

  “We forecast a 50 basis points increase in inflation in January 2015 to 8.5 per cent, while we note that a further re-adjustment of the mid-point of the naira exchange rate to reflect a fairer value is inevitable. 

  “This would be necessary to calm uncertainties in the financial market regarding policy direction, reduce the incentive for round tripping and more importantly, stem the tide of the decline in foreign exchange reserves,” the securities company said.

  Meanwhile, the apex bank
sustained its foreign exchange provision at a discount in the primary market for importers of selected products. 

  It offered $200 million each at the bi-weekly RDAS auctions held on Monday and Wednesday, selling $199.99 million and $199.44 million at the marginal rates of N168/$.

  The pressures on the Naira at the Interbank and parallel markets reached a height on the back of assessed macroeconomic risks and political uncertainties that consequently spurred capital flow reversals in the financial market and triggered further speculation in the foreign exchange market. 

  The Ad-hoc interventions by the CBN to reduce the demand-supply gap failed to lift the local unit, as it weakened N2 and N3.1 on the close of trading on Monday and Tuesday respectively. 

  However, the Interbank market was shut during official trading hours on Wednesday and Thursday as traders executed the “circuit breakers” agreement, which was designed to halt trading once the naira falls by three per cent from previous close. 

  But Afrinvest noted that with the market already in a panic mood, coupled with the “dollarization” effect of the electioneering spending, external shocks and internal political uncertainties, there may not be respite for the naira in the interim. 

  “We note that the inconsistency of forex guidelines and uncertainties traced to non-review of the mid-point of the exchange rate target band in the reality of a fundamental reprising may continue to fuel speculation in the foreign exchange market. 

  “The N38 spread between the official and interbank rate presents incentives for arbitrage and round tripping, while speculators following a herd pattern may prefer to hold the dollar to preserve value. 

  “There is a strong possibility of the CBN taking a drastic action, perhaps convening an emergency meeting, in addressing the disparity in the different forex markets to save the foreign reserves currently at $33.5 billion,” it added.