Egypt Devaluation To Test CBN Resolve On Naira


NOVEMBER 6, 2016 – After Egypt abandoned its longstanding struggle to hold the value of its currency against the dollar, all eyes will be on the Central Bank of Nigeria (CBN) to see its next move especially since both countries have closely trailed each other in terms of currency reforms.

The Egyptian pound has now gone from the second most expensive currency in emerging markets to the third weakest, crashing 62.5 percent to 13/$ from 8/$ after officials floated the local currency on Thursday Nov.3.

The float had become necessary to put a lid on an unofficial exchange rate growing in leaps and bounds, touching a record high of 18/$1 this week. This gives a spread of 10/$ between the official and unofficial rate hitherto a devaluation, more than fifteen times the spread size between Nigeria’s official and unofficial rates.

Charles Robertson, chief economist at investment bank, Renaissance Capital, says the next six months may be tough for the Egyptian pound but if the float regime works, it will put pressure on the CBN to allow a true float.

Compared to emerging market currencies, the naira is the fourth weakest at N310/$ (official rate), above Indonesia, Korea, Chile and Colombia, but the CBN’s role as the single largest supplier of dollars is distorting the market and eroding investor confidence.

“All that investors hope for is that Nigeria allows the market do its job in determining the naira-dollar exchange rate,” Robertson says.

He adds that the pressure from the international community on CBN to unshackle the market of its aggressive and misleading intervention is not as pronounced as pre-devaluation in June, because there are less foreign investors in the country currently.

“But when Nigeria goes on investment road show to raise foreign loans, investors will ask all the questions because they are probably thinking, if Egypt can do this, then why not Nigeria?”

Nigeria’s planned external borrowing of $30 billion dollars within three years (2017-2019) may have gone cold following a spat between the executive and legislative arm over the strain it may have on public coffers.

But the country will certainly face foreign investors for a planned $1 billion Eurobond this year, which is only the first tranche of a total $4.5 billion, as it tries to spend its way out of economic recession and avert high local borrowing costs.

Nigeria and Egypt have been leapfrogging each other with a raft of reforms to cushion the aftermath of a plunge in commodity prices and its ugly implication on their economies.

Seeks after Nigeria floated the naira in June, Egypt followed suit, although the International Monetary Fund (IMF) thought the Egyptian pound was still overvalued at 8.8/$ from 7.8/$.

However, the IMF has welcomed Egypt’s move to devalue some more and all seems set for approval for a $12 billion loan from the Fund.

The three-year loan, which was approved in principle in August, hinges on Egypt’s ability to secure $6 billion in bilateral financing, cut subsidies and adopt a flexible exchange rate.

Analysts at investment bank, FBN Quest say an IMF deal could also do Nigeria some good in boosting dollar supply to grease its illiquid currency market.

“So we are far from the intended floating exchange-rate regime because we cannot see the trigger which will prove the game-changer,” Chinwe Egwim, a fixed income analyst at FBN Quest said in a note to investors on Friday, Nov.4.

“We rule out a surge in the oil price, a huge programme of privatisation and IMF borrowing. The solution will be piecemeal and patience is advisable,” Egwim added.

Data from the CBN show that gross official reserves declined by $580 million in October on a 30-day moving average basis to $24.0 billion. The monthly average movement has been an outflow of US$490m over the past 12 months.

As in Nigeria, Egypt’s external reserves have plunged and both countries are dealing with a thriving black market where unmet demand from the official market run to, for cover.

Egypt’s reserves have hovered around $16 billion since the end of 2015, at half of the pre-2011 levels. But recent loans from the World Bank and Saudi Arabia helped replenish those reserves, which amounted to $19.6 billion at the end of September, compared with around $16 billion the month before, according to its central bank figures.

h countries have come under the knife for using limited external reserves to defend their currencies against all odds.

However, Egypt appears first to react, citing the need to attract independent dollar flows and slow down the pace at which its external reserves were burning, as the reasons for allowing the Egyptian pound float.

Yvonne Mhango, sub-Saharan Africa economist at Renaissance Capital says “It is anyone’s guess when the currency issues in Nigeria will be resolved.

“They could even stay until Nigeria’s presidential election in 2019,” Mhango said in a note to investors on Thursday, Nov.3.

Nigerian President Buhari has often expressed his dismay at letting the naira weaken, spurring fears that it may take a change of leadership in Africa’s most populous nation to have a true naira float with less government intervention.

The IMF reckons Egypt will grow by 3.3 percent in 2016, above the 2.3 percent of both Nigeria and Morocco, or the 0.6 percent of South-Africa, and only behind Kenya’s 6 percent growth among the larger equity markets.

Ayo Teriba, an economist and CEO of consulting firm, Economic Associates, says whether Egypt’s currency float will test the resolve of the CBN is unclear except Egypt sees the policy through, without too much intervention from the CBE to defend the Egyptian pound.

“Egypt emphasized that they were waiting to raise dollar supply to a substantial amount so as to help the currency stabilise, but the CBN opted for a float when dollar inflow was gummed up,” Teriba said by phone.

The CBE, which also raised interest rates by 3 percentage points, said the decision to “liberate exchange rates” was intended to return the buying and selling of foreign currency to the banking sector to “better reflect supply and demand.”


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