Poll Postponement Unsettles Currency, Equity Markets

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The naira and equity markets are expected to weaken further following the postponement of the general election by the Independent National Electoral Commission (INEC), analysts said on Monday.

Confirming their forecasts, market capitalisation at the Nigerian Stock Exchange (NSE) fell significantly by N208.381 billion on Monday to close at N9.796 trillion, compared with the N10.005 trillion at the close of trading last Friday.

Similarly, the naira fell to a record low despite the intervention by the Central Bank of Nigeria (CBN). The nation’s currency closed at N196.50 against the dollar, extending its slide since the start of November to 18 per cent, according to Reuters.

The naira also slumped 12 per cent against the dollar at the interbank market in the past three months, the biggest decline among 24 African countries tracked by Bloomberg, while in the Apapa area of Lagos the naira sold for around N207 to a dollar in the bureau de change segment of the market yesterday.
On a similar note, Nigeria's short-term bond yields, according to Reuters, rose slightly yesterday following the election delay. Dealers said some investors were selling off bonds to lock in higher yields at an auction this week, where the Debt Management Office (DMO) plans to raise N90 billion.

Nigeria's 2016 bond yield rose to 15.17 per cent, up from 15.05 per cent while 2017 bond yield climbed 0.12 percentage points to 15.40 per cent. The 2022 and 2024 bonds traded flat.

In its comment on the trajectory of the local currency, Renaissance Capital (RenCap), an investment and financial advisory firm, in a report yesterday said that the protracted uncertainty would weigh on the naira.

According to the firm, the 2015 presidential election promises to be the “tightest since the resumption of civilian rule in 1999”.

It anticipated that with the shift of the polls’ dates, the CBN “would prefer to wait until after the elections to make difficult policy decisions”.

It however noted that the low level of forex reserves ($33.9bn as at February 5), and its accelerated decline since the beginning of February, “leads us to believe the CBN may not be able to hold out for six weeks”.

It added: “Forex reserves are now at the same level they were in 2011, when the CBN devalued the naira. Forex reserves fell by $408 million in the first week of February, double the $215 million decline in January.

“We think the CBN may be compelled to act sooner rather than later – particularly now that protracted political uncertainty is likely to intensify downward pressure on the naira, with increased risk of soft capital controls.

“Our base case is that a formal devaluation will be avoided until after the elections. We expect the CBN to move the mid-point of the official exchange rate band to above N200/$1. This would imply an interbank exchange rate close to N220/$1.”

Continuing, Rencap noted: “However, to hold off a devaluation, we think Nigeria may require soft capital controls, which would lead to FX liquidity getting squeezed again.

“This increases the risk of JP Morgan removing Nigeria from its key emerging currency bond index (JP Morgan will assess Nigeria’s place in the index in 2Q15) and forex reserves falling to such an extent that current credit ratings come into question.

“Our most plausible alternative scenario (30-40 per cent probability) is that the CBN will loosen its hold on the naira before the 28 March elections. It would do this by allowing the naira to weaken on the official forex market (as it did in November, before the 8 per cent devaluation), which would translate into corresponding depreciations in the interbank and bureau de change markets. We believe this would help the CBN to stem the fall in reserves.”

Also, the Managing Director/Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane was quoted by Bloomberg as saying, “We are going to see the market react in a negative way. The economic uncertainty of the country has increased. By extending the uncertainty, investors who were waiting for the outcome of the election will not come back.”

On his part, the Head of Research at Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said: “We had expected that after companies release their full-year results in March and the election is over, some stocks will begin to recover. The postponement has extended the market uncertainties.”

Also, the London-based Head of Africa Strategy at Standard Chartered Plc, Samir Gadio, said: “The market is likely to remain in a risk-aversion mode this week.”

However, the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, speaking on ARISENEWS TV (a THISDAY sister company) yesterday, allayed investors’ concerns on the economy.
She said there was no reason for the fear, as INEC and President Goodluck Jonathan had promised that the elections would hold by March 28 and April 11 and the handover date of May 29 would remain unchanged.

While acknowledging that the naira was under pressure due to dwindling oil prices, she said even the World Bank had predicted that Nigeria would grow at 4.8 per cent this year.

“This shows that the Nigerian economy, unlike others that are contracting, still has traction, and most of this growth is driven by the non-oil sector.

“So what this means is that even with low oil prices, we have other segments of the economy that could add another $3 billion to the coffers this year which would be shared by the states.

“It could be better but it shows that the non-oil sectors' contribution to total revenue is growing and we intend to tap on this to diversify the economy,” she said.

On declining forex reserves and lack of savings in the Excess Crude Account (ECA), the minister reminded her interviewer that when she came in as finance minister in 2011, there was only $4 billion in the ECA, but the administration managed to grow the savings to $9 billion by January 2013.

“However, the states kept insisting on sharing the money and despite the pleas by the president, they insisted on the constitutional provision, which stipulates that all monies accruing to the federation must be shared, until most of the savings were depleted.

“But I believe that with what has happened, they have learnt that we cannot continue like this and it is my hope that we go back to the savings culture which served as a buffer in the past,” she explained.

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