LAGOS, Feb 28 (Reuters) – “What is a cynic?” asks Cecil Graham in the Oscar Wilde play “Lady Windermere’s Fan”.
“A man who knows the price of everything and the value of nothing,” replies Lord Darlington.
Traders of the Nigerian naira may identify with such cynicism, as they try to determine whether the currency of Africa’s second-biggest economy is overvalued.
The naira has taken a beating in dollar terms this year as the United States has started to rein in a stimulus programme that spurred fund flows to emerging markets, and after Nigerian President Goodluck Jonathan ousted respected central bank governor Lamido Sanusi last week.
But does anyone know the real value of the naira? In a country that imports 80 percent of what it consumes and ships back little except oil, which is denominated in dollars, many analysts are unsure.
“I don’t think the concept of overvaluation is relevant in an economy where oil accounts for 95 percent of exports and the non-oil export base is constrained by significant … bottlenecks,” is how Standard Bank’s Samir Gadio puts it.
The naira’s value is crucial to bond investors who have been wooed by Nigeria’s high yields in recent years as returns in developed markets were eroded by the financial crisis.
Since a devaluation in November 2011 the central bank has aimed to manage the naira within a band of 150-160 to the dollar. But it is now trading 5 naira outside the band at around 165, despite the bank’s efforts to keep the band intact via foreign exchange auctions, which are depleting foreign exchange reserves.
Some analysts expect the Central Bank of Nigeria will be forced to devalue the currency again soon – yet uncertainty about its real value means devaluation is not a one-way bet.
A day after taking over from Sanusi, acting central bank governor Sarah Alade pledged to do everything to support the naira, and stressed there were no immediate plans to devalue.
Sanusi’s nominated successor Godwin Emefiele is expected to stay the course.
But they face a three-horned dilemma: spend dwindling reserves, give up and lower the band, or tighten monetary policy considerably by raising interest rates, now 12 percent.
“The naira is overvalued on an (inflation-adjusted) real effective exchange rate basis,” said Angus Downie, head of economic research at Ecobank, adding however that the bank might still try to keep the 150-160 band if it believes it has enough reserves to continue supporting its position.
“The options for the (central bank) to maintain the current band are diminishing in line with the fall in net FX reserves,” he said, “unless oil prices or oil production increase strongly – both unlikely in the short term.”
The naira hit a record low of 169 to the dollar last week after Jonathan suspended Sanusi, a move that came after the central bank chief, whose term was due to expire in June, had denounced huge leakages in government oil revenues ahead of 2015 elections.
The president denied Sanusi’s suspension was related to his interference in politics but the decision spooked investors and the naira has now lost 3.6 percent this year.
Those who do subscribe to the notion of a correct naira value mostly believe it still has far to fall. The bank’s resources to support the currency are weakening: liquid reserves have slipped by $3.26 billion, or 8 percent, since the start of 2014 to $39.2 billion – or by about $57 million a day.
Analysts at Renaissance Capital said this week that reserves could fall to $35 billion before the bank would be forced to give up the game and devalue.
Gregory Kronsten at FBN capital thinks “at the current pace of depletion, the tipping point would come within weeks.”
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