Nigeria’s Woes Deepen as Central Bank Missteps on Currency

by Paul Wallace

Nigeria's Central Bank Governor Godwin Emefiele said, “The central bank remains a very independent institution, just like it was under my predecessor. We have never been influenced by any political consideration. No politician talks to us to try and influence us.” Photographer: STR/AFP via Getty Images

(Bloomberg) -- As if the collapse in crude prices, forthcoming elections and an Islamist insurgency weren’t enough, investors in Nigeria have another matter to worry about: deciding whether the new central banker is his own man.
Godwin Emefiele, appointed in June after President Goodluck Jonathan suspended predecessor Lamido Sanusi almost a year ago, has focused on stemming currency declines that could damage the government of Africa’s biggest oil producer and economy ahead of Feb. 14 elections. Emefiele is “putting off painful and inevitable adjustments” in the exchange rate until after the vote, Bank of America Corp. economists Oyin Anubi and Turker Hamzaoglu in London wrote in a Jan. 21 report.
“It’s only natural to think there’s less independence at the central bank,” Kevin Daly, a fund manager overseeing $13 billion of developing-market debt at
Aberdeen Asset Management Plc, said by phone from London on Jan. 27. “He replaced arguably the most effective and outspoken central bank governor that we’ve seen in African emerging markets for some time.”

Daly said he hasn’t held government bonds in naira since about October, partly because of concern he might not be able to easily sell assets in the currency.
Emefiele, 53, said that politics doesn’t affect any of his decisions.
“The central bank remains a very independent institution, just like it was under my predecessor,” he said by phone from Abuja on Thursday. “We have never been influenced by any political consideration. No politician talks to us to try and influence us.”

JPMorgan Warning

Still, the naira has become a campaign issue, with opposition leader Muhammadu Buhari’s team pointing to the weakening purchasing power of the currency under Jonathan. While oil producers with falling exchange rates from Russia to Malaysia have avoided imposing currency controls, Emefiele’s measures cut daily trading of the naira to less than a tenth of previous levels last month, according to Standard Chartered Plc.
The restrictions prompted JPMorgan Chase & Co. to warn Jan. 16 that it may remove Nigeria from bond indexes tracked by more than $200 billion of funds. Foreign holdings of domestic debt have fallen by half since 2013, according to Standard Chartered.
“It’s difficult for policy makers to ignore that political backdrop,” Ayodele Salami, who oversees about $200 million of Nigerian equities as chief investment officer of Duet Asset Management, said by phone from London on Feb. 4.
Investor caution has helped drive yields on local government bonds to 15.4 percent, the highest since August 2012 and steepest among 31 emerging markets tracked by Bloomberg. The stock market is posting the world’s worst losses this year.

Jonathan’s Showdown

The naira strengthened 1.8 percent to 188.90 per dollar as of 8:38 a.m. in Lagos to pare losses over the past six months to 14 percent, the most among 24 African currencies tracked by Bloomberg. The exchange rate could still tumble to 252.50, prices on 12-month forward contracts show.
Jonathan, 57, a Christian from the south, faces Buhari, a 72-year-old northern Muslim and former military ruler, in Nigeria’s tightest election since army rule ended in 1999.
Tensions are rising with the Islamist militants Boko Haram declaring a caliphate in northeastern Nigeria that’s the size of Belgium. The group killed more than 4,700 people last year, double the number of deaths during 2013, according to Bath, U.K.-based risk consultancy Verisk Maplecroft.
Jonathan ousted Sanusi last February, accusing him of “financial recklessness and misconduct.” Now the Emir of Kano, Nigeria’s second-most important Islamic ruler, Sanusi had called on Jonathan to investigate billions of dollars of oil revenue he said were unaccounted for.

Speculative Demand

Emefiele took over in June, days before crude prices began their 50 percent plunge. Oil provides about 90 percent of Nigerian export earnings and 70 percent of government revenue.
The central bank spent $5 billion defending the exchange rate in the last three months of 2014, reducing reserves to a three-year low of $34 billion, while devaluing the midpoint of the official exchange rate to 168 per dollar from 155 and raising the benchmark borrowing cost to a record 13 percent.
Trading restrictions introduced in December were needed to cut “spurious or speculative demand” for dollars, Emefiele said in an interview last month. “Any investor that wants to go out is able to do so freely, without any hindrance.”
While Sanusi cut the the amount of foreign currency banks can hold without assigned buyers to 1 percent of shareholders’ funds from 5 percent, Emefiele set the amount at zero on Dec. 17, before allowing a 0.1 percent so-called net open position on Jan. 13.

Trading Crushed

The effect was to reduce daily trading to less than $30 million from $300 million to $500 million and foreign holdings of government bonds in naira to 14 percent of the total from as much as 27 percent in 2013, according to Samir Gadio, Standard Chartered’s head of African strategy.
By contrast, Sanusi liberalized Nigeria’s markets by lifting a requirement for foreign investors to hold local-currency debt for at least one year. That resulted in JPMorgan adding the nation’s bonds to its GBI-EM local-currency indexes in 2012. Foreigners increased their holdings of the securities almost fivefold in the next year, according to Bank of America.
“Sanusi had high credibility in the international markets and both the nature of his exit and the context resulted in an increase in Nigerian risk premium, which has remained,” Jim O’Neill, the former chairman of Goldman Sachs Asset Management, who now works as a Bloomberg View columnist, said in e-mailed comments from London on Jan. 28.

Negative Watch

JPMorgan, placing Nigeria on “index watch negative,” said the drop in currency and bond trading “challenges the ability of foreign investors to replicate the benchmark.” The New York-based lender will make a decision within five months. Craig Macdonald, a spokesman for JPMorgan in London, declined to comment.
The central bank’s decision to boost the net-open position limit to 0.5 percent of funds on Jan. 22, shortly after JPMorgan’s warning, increased daily trading volumes to about $250 million to $300 million, Emefiele said on Thursday.
“We are confident we will remain in the index based on the decision,” Emefiele said. “The main issue was liquidity and we are convinced that liquidity has come up to the level they desire.”
For the market to “unfreeze,” the exchange rate probably needs to weaken to 220 per dollar, Antoon de Klerk, who helps oversee $18 billion of emerging market debt at Investec Asset Management Plc, said by phone from London Feb. 2.