At the end of 2019 and in the early part 2020, media reports showed that the CBN Governor had told investors in London that the apex bank would only consider a review of its exchange rate management mechanism if Nigeria’s FX reserves were to fall below $30bn. Also, the governor was quoted to have said that “for as long as oil prices remain in the $50-60/b range, there will be no reason to consider a devaluation.”
However, fast track to the time of writing this report, Brent price ($25.5/b)is trading way below the CBN’s lower band of $50/b. Also, gross FX reserves now stand at a worrisome level of $36.05bn (vs. CBN’s devaluation trigger level of $30.0bn). Accordingly, this has raised the panic level in the market as speculative demand, driven by plunging oil prices, triggered a run on the naira over the last few days. Notably, the CBN has had to ramp up interventions at the Investors and Exporters (I&E) window, touching an all-time monthly high of $2.1bn in Feb-2020 and a weekly high of c. $1.0bn in the first week of March-2020.
In our view, we believe the probability of currency adjustment by H2-2020 is now heightened, especially if the current realities remain the same or worsen and Nigeria is unable to tap the international debt capital market. Give or take, we expect panic purchases and market speculation to keep the local unit pressured for the rest of the year, averaging around N370/$ at the I&E window, ahead of an imminent adjustment by the CBN.
United Capital Research