Experts in the financial industry see the naira stabilising as the price of the country’s main export commodity – oil, bottoms out on the international market.
Brent Crude fell 28 per cent – the largest fall in two years; and is currently trading at $80.73, falling 1.15 percent from the previous trading day.
“We believe oil is nearing a bottom, our investment plans were initially based on $75 a barrel”, said NSIA MD/CEO, Uche Orji at the 2014 FBN Capital Investor Conference.
International energy analysts echo a similar sentiment, with the target price for oil ranging from $75/b to $80/b.
According to Gregory Kronsten, FBN Capital chief economist, , “oil price will be contained by the high extraction cost of shale and Russian production, northern hemisphere winter, and favourable geo politics”.
“$75 is the technical target,” said Kyle Cooper, director of commodities research at IAF Advisors by phone to Bloomberg.
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A recent Goldman Sachs report forecasts Brent hitting a floor of $80 a barrel in the second quarter of 2015, then rising to $90 in 2016 as US shale oil production slows down.
Nigeria is heavily dependent on oil exports with oil revenues accounting for around 95 per cent of total exports, according to CBN data, and has historically contributed 70-80 percent of consolidated government revenue.
A Standard Chartered report points out that based on previous experience, Nigerian FX rates and external assets tend to come under pressure when the oil price slides to or below current levels. “When the oil price fell to USD 90/bbl in June 2012, this was associated with a considerable sell-off in the NGN and Nigerian fixed-income and equity instruments”.
Oil supply has been outstripping demand by 600,000 barrels per day, according to the OPEC Secretary General.
With the fall in oil prices, naira denominated assets experienced a sell-off by international investors, amid fears of a deterioration of the naira-dollar rates.
The naira strengthened to N167.55 per dollar, according to data from FMDQ, compared with N168.25 per dollar from the previous trading day.
According to Kronsten, “the CBN will be able to hold the line on the naira.”
However, in the near term, the naira is expected to be devalued.
This is especially necessary, as most global currencies have depreciated against the dollar, leaving Nigerian manufacturers at a disadvantage, compared to West African economies with currencies such as the CFA franc pegged to the Euro.
“The CBN will have a hard look at this at the next MPC meeting,” said Bismarck Rewane, CEO of consulting firm, Financial Derivatives Company (FDC), at the FBN Capital investment conference held in Lagos yesterday.
“If you don’t adjust the currency lower and quickly it will hurt… and you have to do it anyway. The CBN cannot coast all through to February, it needs to act dramatically.”
Yinka Abraham & Dozie Ifebi
