Strategy Note /

Nigeria: FX devaluation starts, likely more to come

  • Investor-exporter FX rate devalues 4%, official rate devalues 15%

  • Positives: show of FX rate flexibility, narrower gap in dual FX rates, higher fiscal oil revenues in Naira terms

  • But further devaluation likely, considering oil-exporter peer devaluation and overvalued starting point

Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
22 March 2020
Published byTellimer Research

The Nigeria investors and exporters (I&E) FX rate has devalued about 4%. The official rate, which is directly less relevant for foreign investors has devalued about 15%. 

This action partially addresses our concern that the authorities would opt for capital controls instead of allowing currency flexibility; an action that would make local currency assets potentially uninvestable despite very cheap valuations, in equities for example – see Nigeria: Deep value or deep trouble?, 13 March 2020. 

By narrowing the gap in the dual-rate regime, the authorities also have partially addressed the unfair competitive advantage given to those entities able to access US$ (for imported inputs or machinery) at the stronger official rate and the resulting economic distortions (rent-seeking, less competition, lower overall investment). 

However, there is likely further devaluation required and the risk of capital controls is not off the table as yet:

(1) Oil revenues drive 90% of export revenues and peer oil-exporters with more flexible FX regimes have devalued significantly more than the Naira (I&E window), following the c60% decline in oil prices ytd. Excluding the GCC (with the deep sovereign reserves of its richest members) and Ghana (which devalued c22% over the past two years and c15% in 2019 alone), the range of devaluation, since the start of 2020, exhibited by Colombia, Kazakhstan, and Russia is 15-22%;

(2) Nigeria real effective exchange rate (using the I&E Naira) was expensive on an absolute basis (and relative to its prior 10-year average before the recent collapse in oil price; after this devaluation the REER still implies c20% over-valuation and the premium versus historic average is still c10% – see FX rate risk in EM, FM amid global disorder, 10 March 2020;

(3) The depression in oil prices may persist for a long period given the inconsistent goals of Saudi (regain marginal price-setting power) and Russia (damage the existing owners of US shale assets), as well as the deep sovereign resources of both – see Oil war: Saudi, Russia can sustain a long war, but a 35% price drop shortens it, 9 March 2020.