Naira’s strong start to 2012
A turbulent H2’2011 saw the Central Bank of Nigeria (CBN) falter in this efforts to maintain the Naira/US dollar (NGN/USD) exchange rate band (-/+3% of N150/USD) at its Wholesale Dutch Auction System (WDAS), and the adoption of a revised target exchange rate band of -/+3% of N155/USD. However, as I expected, the Naira has begun 2012 on a strong note. At yesterday’s WDAS auction, the Naira appreciated 0.10% to N156.85/USD, as the CBN once again sold US$250 million. While total demand at yesterday’s WDAS was not disclosed, the exchange rate move left the Naira within the N156/USD – N158/USD trading band which the CBN appears to have adopted, after its November, 21st 2011 decision to devalue the Naira.
On the interbank market the Naira closed at N160.05/USD yesterday (a 3-week high against the US dollar), after touching a 2012 high of N159.80/USD during intraday trading. On the parallel market, the Naira also strengthened to N164/USD as traders appeared to benefit from the increased US dollar liquidity from interbank sales of US$100 million, US$66 million and US$10 million, by Royal Dutch Shell, Total and Addax respectively.
Whats up?
In previous a commentary, I highlighted the growing importance of imports and direct remittances (a proxy for non-trade related demand composed largely of financial instrument transfers by non-Nigerian individuals and corporations to their home countries) in shaping the level of “fundamental” demand at the WDAS -- and by extension of the direction of the Naira. To this end, while the CBN has remained tight lipped about the levels of demand at the WDAS thus far in 2012, data from the National Bureau of Statistics (NBS) indicates that imports declined 13.3% YoY by October 2011 (in what appears to be a continuing trend from the previous two quarters). Furthermore, data from the CBN shows that direct remittances as a percentage of WDAS sales declined 50.34% in Q4’2011. With regard to this point, I do not rule out the role of monetary policy initiatives taken in October and November 2011 to support the Naira/US dollar exchange rate in shifting the direction of currency flows. However, given the tighter regulatory environment, anecdotal evidence in the form of average WDAS/interbank exchange rate differentials, suggests that a positive shift in market dynamics and expectations may have occurred. In all, market participants have remained largely in tune with the CBN’s “apparent” policy trading band of N156/USD – N158/USD thus far in 2012 as is evident from the fact that the average WDAS/interbank exchange rate differential has declined 31 kobo from N4.33 to N4.03 thus far in 2012.
Optimism!!!
On balance, I remain cautious in forming an outlook for the Naira/US dollar exchange rate in 2012, given the multitude of factors and evolving uncertainties that are shaping its direction. While my prognosis for the Naira in 2012 is largely positive, I expect the Naira’s direction to ultimately be determined by the level of external reserves and market expectation. On the latter point, market data suggests that expectations for sharp Naira declines in 2012 have become more subdued, although I suspect that the recent reversal of the government’s decision to completely eliminate subsidies on petroleum product – as well as moves being considered by the Senate to revise the benchmark price for Bonny Light crude in the 2012 budget could weigh negatively on those expectations. On the former point, data from the CBN shows that Nigeria’s external reserves are currently at US$33.96 billion (the highest level since October 19th 2011), as the combination of moderating demand and improving accruals have combined to strengthen reserves. On this point also the aforementioned risks are relevant.
Given my expectations that fuel subsidies are likely to require ~N790 billion in additional spending in 2012 (44.4% of the N1.78 trillion used in 2011), I have tempered the impact of these risk on my expectations for the Naira –- assuming that crude oil prices remain stable and no major disruptions to supply occur in H1’2011. Furthermore, I have incorporate the possibility of a positive surprise like proceeds from the disposal of PHCN assets, which was not included in the 2012 revenue forecast in the 2012-2015 Medium Term Fiscal Framework in coming to a largely more positive view of the naira in 2012.
