Number of Trades Decline 7,500% As CBN Curbs Bets Against Currency

The Central Bank of Nigeria (CBN)’s efforts to shore up its currency are crushing foreign-exchange trading.
There were five trades in the naira during the two and half hours, compared with 380 trades on December 16, according to data compiled by Bloomberg from at least 42 local and international banks. This signifies a sharp decline of 7,500 per cent in number of trades.
The Central Bank of Nigeria last week said lenders must clear positions daily after previously being allowed a net-open position of one per cent of shareholder funds. It also ordered dollars bought from banks be used within 48 hours or sold back to the regulator.
“The perception has undoubtedly been left by the central bank that these are capital controls,” Ayodele Salami, who oversees about $200 million of Nigerian equities as chief investment officer of Duet Asset Management Ltd., said by phone from London. “It creates more volatility.”
The slump in trading shows how Nigeria is struggling to curb currency declines as crude oil’s 50 per cent slide from this year’s high hurts producers from Saudi Arabia to Venezuela. The central bank’s steps stand in contrast to Russia, where the world’s largest energy producer has resisted capital controls, last week raising interest rates by the most in 16 years to stem a slide in the ruble.
The naira strengthened 1.6 per cent to N182.75 per dollar, paring losses this quarter to 10 per cent, the most in Africa after Malawi’s kwacha.
“Liquidity has collapsed,” Samir Gadio, head of African strategy at Standard Chartered Plc in London, said in an e-mail yesterday. “There is still no activity in the foreign-exchange market following last week’s regulatory measures. The risk with the current situation is that the black-market rate may soon diverge significantly from the interbank foreign-exchange rate.”
Policy makers in Nigeria, which gets 70 per cent of government revenue and almost all export earnings from oil, have proposed spending cuts and last month raised interest rates 100 basis points to a record 13 per cent in a bid to stem capital outflows and defend the naira. The central bank on November 25 also moved the naira’s official peg for twice-weekly auctions to a midpoint of N168 per dollar from N155 and widened its trading band to five percent either side from three percent.
“Because the central bank is taking different measures almost every day, it looks as though it’s losing control,” Stuart Culverhouse, chief economist at frontier-markets investment company Exotix, said by phone. “That’s the bigger problem for investors.”
Steps taken by the central bank are “short term” to stabilize the market, spokesman Ibrahim Mu’azu said by phone from the capital, Abuja, declining to comment further.
The efforts do not amount to capital controls, Charles Robertson, global chief economist at Renaissance Capital Ltd. in London, said by phone. Nigeria has had to take different measures to Russia because it is “more fragile,” more dependent on oil and faces elections in February, which makes it harder to enact monetary policy, he said.
Dollar demand may be “temporarily high” before the vote and should ebb with the holidays approaching, Richard Segal, head of emerging-markets credit strategy at Jefferies International Ltd. in London, said by e-mail. The central bank may lift the rules in a month, provided there are no more oil shocks, he said.
Nigeria’s economy remains resilient in the face of falling oil prices and may expand five per cent next year, Aurelien Mali, a senior analytical adviser for Moody’s Investors Service, said in a statement yesterday. Moody’s rates Nigeria’s debt at Ba3, three levels below investment grade, with a stable outlook.
Nigeria is drifting toward political violence that may result in disputed elections and authorities need to take action to stop it, Brussels-based International Crisis Group said in a report last month. President Goodluck Jonathan’s ruling People’s Democratic Party will face an opposition led by former military dictator Muhammadu Buhari, the stiffest challenge since the PDP came to power at the end of army rule in 1999.
The central bank has other options it can use rather than the administrative measures announced last week, said Salami of Duet, which manages $5.5 billion in equities. This could include raising interest rates, using reserves more aggressively or increasing cash-reserve requirements on foreign-exchange deposits, he said.
“It’s behaving like a rabbit caught in the headlights of an oncoming car that doesn’t know which direction to go,” Salami said. The measures announced last week “have made a bad situation worse,” he said.

Leave a Reply

Your email address will not be published. Required fields are marked *