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Naira drop hits investments and lending with mixed results

The relaxation in Nigeria’s FX policy has led to a significant devaluation of the naira. Investment will still likely be slow on the local currency side, but foreign currency investment could soon rise. Nigeria’s banking sector will likely suffer in the short term from the naira’s devaluation, but could see a pickup in the long term through dollar inflows.

Jun 22, 2016 // 5:04PM

Whilst artificially pegged against the US dollar, the naira was trading between 197 and 199 to the dollar. It was trading in the 300 range on the black market. After it’s unpegging on Monday, the naira fell by 24% against the dollar to 260.5 against the greenback according to data compiled by Bloomberg.

The naira has since fallen further, and is currently trading at 283.499 to the dollar. Moody’s, in a recent note on Nigeria stated that the naira, once fully driven by market forces, is likely to fall to 305 to the dollar.

The volatility in the naira is likely to continue to be present due to fluctuating oil prices and security challenges. Militants operating in the region continue to disrupt Nigerian oil output according to Nick Chambers, Director at Africapractice.

The Naira’s unpegging has caused fluctuations elsewhere. The S&P Global Ratings’ Nigeria sovereign bond index fell from 163.79 last Friday to 115.09 yesterday on the depreciation of the naira.

The index had previously remained relatively flat at around the 160 mark over the last month before the unpegging.

Despite a fall in the government’s 10-year sovereign bond index, a free floating naira actually removes previous obstacles to foreign investment. But, an unpegged naira will not necessarily lead to increased investment, especially on the local currency side.

“Foreign investors still need to consider the country's economic and political outlook before investing in local currency bonds, and this will ultimately determine their yield,” Chambers said.

However foreign currency investments could increase. The note from Moody’s stated that a flexible exchange rate would allow for an increase in net portfolio inflows, which fell from US$13.2bn in 2013 to US$2.5bn last year.

The country’s banking sector is also likely to be affected by the depreciation of the naira. In the short term it could have a negative impact on the sector. A depreciation of the naira would hurt the country’s banks as foreign currency lending accounts for 45% of the sector’s total, according to a Moody’s note. The CRA said bank dollar lending in Nigeria decreased by 5.1% over Q1 2016 from the previous year.

The report added, however, that the alleviation of the dollar shortage through FX investment would partially offset the impact of this.

Africa Currencies Policy & Government

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