The currency on Thursday plunged to an all-time low of 173.95 against the US dollar, down nearly 9 per cent since January, the Financial Times reports. The Nigerian Central Bank has been actively intervening to support the naira for days, but the $1bn it has spent over the past two weeks has failed to halt the slide.
â€œWe believe that the risk of currency devaluation has increased significantly in recent days,â€ Ridle Markus, analyst at Barclays in Johannesburg, said in a note.
Emad Mostaque, at emerging markets consultants Ecstrat, added that Nigeria could face a â€œspeculative attack on the currency in the next few months, similar to that Turkey experienced earlier this year and Russia has just experienced nowâ€.
The naira could turn into a political headache for Goodluck Jonathan, the Nigerian president who is seeking a second term in elections next year.
Central Bank officials have insisted Nigeria is in control of the currency drop, and say that current gross foreign reserves, equal to more than seven months of imports, are high enough to manage the exchange rate. Godwin Emefiele, who is fighting his first crisis since taking over from Lamido Sanusi as the Central Bankâ€™s governor earlier this year, said there was no need for panic. â€œThe Central Bank has always intervened . . . We believe weâ€™re very safe,â€ he told Bloomberg News.
But Nigeria, the largest oil producer in Africa, is particularly exposed to falling hydrocarbon prices. The government, which typically depends on oil and natural gas exports for about 80 per cent of its revenues, is assuming an oil price for its 2015 budget of $78 a barrel, close to current prices of $80.
During the oil price crash of 2008-09, when Brent crude dropped from $150 to $50 in a matter of months, Nigeria de facto devalued its currency. The naira lost 25 per cent of its value from December 2008 to January 2009 before the government fixed the exchange rate at 145.5 and imposed a tight trading band.
Since then, the Central Bank has allowed the currency to slowly depreciate against the dollar, but the crawl has turned into a flight for safety in recent days. Gareth Brickman, analyst at Johannesburg-based ETM Analytics, said the Central Bankâ€™s focus on interventions, rather than hiking interest rates or an outright devaluation, was â€œimprudentâ€. Other analysts largely agree. Nigeria is sitting on $37.8bn in foreign reserves, compared with $53bn when the oil price plummeted in 2008.
The currency depreciation has been exacerbated by foreign investors liquidating their positions in the Lagos Stock Market, which since January has lost 18.4 per cent and it is now the worst-performing market in Africa, coming below Zimbabwe.
With oil prices at a four-year low and foreign investors selling both Nigerian equities and bonds, the pressure on the naira could increase again. The currency market is increasingly betting that Abuja will devalue the currency after the presidential elections.
On Wednesday, the 12-month non-derivable naira forward contracts â€“ which investors take as a gauge of devaluation risk â€“ plunged to nearly 200.
The market is now watching the Nigerian Central Bankâ€™s next policy, scheduled for November 24-25, for any sign that the monetary authority will change track. The bank has kept interest rates at 12 per cent for the past three years, and an increase is unlikely, considering the imminent elections, analysts said.