Naira Crumbles as Oil for Loan Deal Extends

Naira Crumbles as Oil for Loan Deal Extends

The Nigerian naira lost weight in the foreign exchange (FX) markets amidst unsettled crude oil from loan deals entered by the authority to support exchange rate management. However, increased demand for foreign currency across the markets continues to keep the naira on a tightrope.  Unfortunately, the outlook is bleak, according to analysts’ consensus.

A slew of FX analysts are projecting that the local currency will fall further without the Central Bank of Nigeria’s (CBN) intervention.

The market is expecting a $3 billion loan from oil for a loan deal strike by the Nigerian National Petroleum Company Limited with the African Export-Import (AFREXIM) Bank.  The amount is aimed at stabilising the naira.

Across the forex market, the naira struggled, albeit unsuccessful, against the United States dollar at various segments even with confirmation of the new CBN Governor, its Board members and the identification of policy directions, analysts said.

Data from the FMDQ showed that the naira lost strength by 1.00% week-on-week at the official market, closing at N755.27 per greenback while the exchange rate worsened at the parallel market.

In the open market, the naira depreciated by 1.00% week-on-week to a historic low of N1,008 per US dollar as demand pressure continues. However, the FMDQ Securities Exchange (SE) FX Futures Contract Market posted that the US dollar gained across the board against the local currency.

According to Cowry Asset Management, forward exchange rates appreciated in favour of the dollar by 1.17%, 1.10%, 0.97%, 0.73%, and 1.03% for the 1-month, 2-month, 3-month, 6-month, and 12-month contract tenors, respectively.

In a market update, asset managers at the firm said the upward movement in forward rates was a result of increased demand for the dollar across these various tenors. 

Last week, the African Export-Import Bank continued to engage some oil traders, gauging their interests in providing the necessary funding for the USD3.00 billion emergency cash-for-crude oil repayment loan to the Nigerian National Petroleum Company Limited (NNPCL).

Recall that on 16 August, the NNPCL announced that it had secured a USD3.00 billion emergency crude oil repayment loan from the AFREXIM bank, expecting to receive an upfront cash loan against proceeds from a limited amount of future crude oil production.

“While the deal is still in progress, we think that once completed, the loan may serve as a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency.

“Nonetheless, we acknowledge that the amount is not enough to significantly support the local currency, more so that the funds will come in tranches”, Cordros Capital analysts said in a commentary note.

Thus, if not adequately managed with other suggested near-term measures (such as increased crude oil production, higher interest rates and additional funding support from third parties or multilateral institutions) FX pressures may likely build up again, leading to another round of local currency depreciation, the firm said.

In the commodities market, West Texas Intermediate (WTI) crude oil futures rose to $90.7 per barrel. This marked its highest level since November on the back of expectations of larger market deficits in the fourth quarter.

This offset concerns regarding a potential economic recession’s impact on oil demand. Additionally, the price of Nigerian Bonny Light crude oil closed positively at $100.69 per barrel on the back of strong demand.

Cowry Research anticipates the naira to trade in a relatively calm band barring any further market distortion as the new CBN chief assumes duty while the market awaits policy directions and roadmap to ensure the stability of the local currency.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market dropped to a five-month low, declining by 62.7% to N262.56 billion in August from N702.99 billion in July.

Analysts said this time, the local investors led the decline, as domestic transactions which accounted for 85.8% of gross transactions declined by 66.0% to N225.40 billion from N662.45 billion in July. Naira Devaluation Deepens Economic Crisis in Nigeria

At the same time, foreign transactions which accounted for 14.2% of gross transactions recorded a second consecutive month of decline, falling by 8.3% to N37.16 billion in August from  N40.54 billion in July.  Analysts attribute the development to a slowdown in the government’s reform-induced momentum, dampening foreign sentiments.