The naira which has bucked the recent sell-off in emerging markets’ currencies so far this year may be in for some volatility near term as the imminent tapering of quantitative easing by the United States Federal Reserve nears.
Emerging markets, which helped pull the world out of a recession after the global financial crisis, face heightened volatility after an exit of cash and falling currencies in anticipation of the US Federal Reserve’s eventual tapering of its $85 billion in monthly bond purchases.
Nigeria’s relatively sound macroeconomic fundamentals and liquidity tightening measures by the Central Bank of Nigeria (CBN) had helped to shield the local currency year to date.
“The naira (NGN) has actually held up well relative to mainstream EM currencies, which reflects the policy-determined nature of USD/NGN,” Samir Gadio, emerging markets strategist at Standard Bank, London, said in a note released recently.
The naira has lost 4.3 percent versus the dollar on the interbank market this year closing at N163.40 per dollar on September 5.
The local currency has outperformed the South African Rand which is down 18 percent, Egyptian pound down 12 percent, Ghana cedi down 11 percent, Indian rupee down 16 percent, and Indonesian rupiah down 12 percent per dollar, respectively, data compiled by BusinessDay show.
The Nigerian economy grew by 6.72 percent in the second quarter of 2013, while consumer prices in rose 8.7 percent in July from a year earlier as inflation touched a four-year low, according to data from the National Bureau of Statistics (NBS).
The current account surplus – a measure of trade in goods and services – may widen to $20.1 billion or 6.9 percent of GDP in 2013 while the budget deficit should fall to 1.8 percent of Gross Domestic Product (GDP) this year, according to Renaissance Capital’s estimates. Total debt to GDP is 30 percent, including AMCON bonds, well below the EM average.
The country also raised $1 billion – which was four times oversubscribed – through a Eurobond sale in July despite financial market turmoil.
The CBN has supported the naira by squeezing liquidity from the system with its policy of a 50 percent cash reserve requirement (CRR) on public sector funds, and intervening periodically to support the currency by selling dollars.
Foreign portfolio inflows have also helped to boost naira resilience this year as the high interest rate environment ensures an incentive to hold NGN assets domestically, while making the carry trade attractive.
The yield on 16.39 percent Nigerian naira government bonds due January 2022 closed trading in the secondary market at 13.52 percent on September 5, 2013, prices from the Financial Markets Dealers Association (FMDA) show. Foreign investors’ holdings in FGN fixed income securities amounted to $5.112 billion at the end of December 2012, according to the Debt Management Office (DMO).
“Inflows should continue on the bond side as investors are tending to favour countries with good fiscal and current account ratios. Nigeria has both,” Charles Robertson, global chief economist at Renaissance Capital, said in response to BusinessDay questions.
However, with US Treasury 10-year note yields rising to 3 percent last Friday – the first time in two years – on the strengthening US economy, market speculation is increasing that the Federal Reserve will announce plans to slow its bond-buying programme this month, which should pressure the naira in the medium term.
By: Patrick Atuanya
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