Naira: Unstable FX Rates Threatens Eurobond Repayment

Naira: Unstable FX Rates Threaten Eurobond Repayment

Ahead of Eurobond repayment, the Nigerian naira continues to face market pressures following tight foreign currency inflows into the country. The Naira weakness has raised the burden of foreign loan repayments.

For the local currency, upside potential is very limited as investment United States and other foreign currency inflows trend at record lows when compared with pre-pandemic levels, analysts told MarketForces Africa.

According to global rating agencies report and the International Monetary Fund (IMF), a lack of foreign exchange reform remains a downside to foreign investment attraction. 

To foreign investors, US Fed’s hawkish pose has changed the investment playbook with large outflows from leaving Africa markets in particular, forcing large currency depreciation along with an inflation uptrend. 

Africa’s largest market, Nigeria, is not excused for dwindling hot monies. Last week, Nigeria’s foreign reserves declined further even while oil trades above 2023 budget benchmark, according to data from the apex bank website.

The IMF frown on multiple exchange rates and Bank of America came out clearly in the latter part of 2022 that the local currency was 20% above its fair value. In the local FX market, the exchange rate continues to swing both ways depending on the size of foreign currency demand in the official market.

Nigeria’s market rate has been mostly supported by Central Bank’s sustained FX auctions designed to keep rates steady at the official window. The Central Bank of Nigeria’s (CBN) foreign exchange market intervention induced pressures on its gross external reserves position despite lower US dollar inflows.

Nigeria is set to settle a bulk sum of $500 million Eurobond loan in July 2023. Nigeria’s coupon rate for the issuance was priced at 6.375%, maturing on July 12, 2023. The next Eurobond repayment that will require large outflows includes US$ 1.12 billion 7.625% bond on 21-Nov-2025 and a US$ 1.5 billion 6.5% bond note maturing on 28-Nov-2027

Africa’s largest economy by gross domestic product size is battling with multiple issues around its local currency. Rather than gaining, the naira is merely reclaiming loss value in the FX market. The CBN failed naira redesign policy continues to stoke untold hardship on citizens while large losses await corporates as productive activities taper.

Nigeria’s Central Bank chief, with support from the Federal Government, continues to keep mum over the supreme court order that overturned the naira redesign program and extended the use of the old naira till December 2023.

Meanwhile, a decline in crude oil price signals low inflows into Nigeria’s pocket from oil exports – hydrocarbon revenue being a major source of foreign currencies. Naira Steadies as Banks Issue Update on FX Purchase

Last week, the oil market closed negative with a 4.4% weekly loss in Brent crude oil price to $82.04 per barrel – no thanks to overall global economic growth pessimism and expectations that the U.S. Federal Reserve will continue to hike interest rates.

Consequently, despite improved oil production volume, external reserves declined to $36.4 billion, translating to 9-month import coverage, according to analysts.

In the foreign exchange market, the exchange rate improved as importers’ and manufacturers’ demand for the US dollar across the market declined relative to supply, traders said. At the Investors & Exporters Window, activity level fell 19.5% week on week to $539.4 million, Investment banking firm, Africa Limited, said in a note.

Following a slowdown in dollar volume transacted, the Naira appreciated slightly by 0.05% week on week to close at N461.50 from N461.75. In the open market, the local currency edged the greenback, appreciated by N6.00 or 0.79% week on week to close at N752 from N758 in the previous week.

Despite FX illiquidity, analysts anticipate that the Naira would extend this week’s performance across segments in the coming week given the reduced conjectures amidst scarcity of new local currency notes.

A look at activities at the Interbank Foreign Exchange Forward Contracts market, the spot exchange rate remained unchanged at N462 per US dollar. It was all green for the Nigerian Naira index across all forward contracts with appreciations reported for the 1-Month, 2-Month, 3-Month, 6-Month and 12-Month tenor contracts against the greenback.

Exchange rates gained +0.11%, +0.48%, +0.82%, +0.63% and +0.10% week on week to close at contract offer prices of N466.68, N473.97, N482.13, N508.90 and N542.79 respectively, according to Cowry Asset Management Limited. #Naira: Unstable FX Rates Threaten Eurobond Repayment