A combination of crude oil supply disruptions due to pipeline vandalism and a 26 percent drop in crude oil price from its $53 per barrel highs in June this year has pulled the value of the naira down more than 10 percent since late June. At $42 per barrel, crude oil price appears to have bottomed out and is now edging higher. This mini resurgence has strengthened the naira which is now up about 1.6 percent in the last two days.
The sooner the Federal Government solves the militancy unrest issues in the Niger Delta, the better the prospects of an economic recovery within the coming months. Nigeria lost tens of billions of naira in the past month due to falling oil prices and militant attacks on crude oil pipelines. The Central Bank may choose not to respond directly to the weaker Naira since the economic fundamentals support a higher oil price this year settling somewhere above $50 per barrel leading to a stronger Naira.
We believe that a dollar-naira exchange rate of over 300 naira to a dollar is already price in into imported goods and services in the country, hence we worry very little about another inflation spike. However, we must state that although a stronger dollar is bad news for Nigerian companies with foreign debt, it is fantastic news for companies that export non-crude oil products.
Globally, we are starting to see the dollar weaken against major currencies as capital flows out of America. A lot of air pushed into the value of the United States dollar since the British pound plunged after the Brexit vote is starting to come out. A drop in the crude oil price is usually simultaneously followed by a stronger dollar, but not this time. We believe a shift in investment focus away from USA to emerging markets and falling dollar denominated external reserves of foreign nations, especially oil exporting nations will continue to weigh in on the dollar. The search for yield is becoming more and more difficult in America and Europe as the presence of a market bubble becomes more evident. This has driven investors to safe havens like bonds in the Developed economies and high yield securities in the emerging markets. Also, the uncertainty in the United States Presidential race is also causing worry to investors with large exposure in U.S.A. A bit of calmness has returned to Britain after the new Prime Minister was announced though the pound still remains considerably weak but the catastrophic size of non-performing loans in Italian Banks has raised tensions in the European markets.
We still believe that the naira will continue to weaken against the currencies of the developed nations going into the future. If you are a currency speculator, the last thing you want to be holding is the Nigerian Naira.
Emeka Ucheaga,
Managing Partner,
Emeka Ucheaga Advisory
Comments
Post a Comment