The Naira fell to 164.07 against the USD this morning as the US Dollar index rose for the 7th day in a row. The stronger US Dollar is leading to declining crude oil prices and Nigeria’s bonny light sweet crude price fell below $ 95 per barrel. There is still a cushion of $ 20 per barrel above the assumed export price in the 2014 budget.
There was a lack of demand for FGN bonds and Treasury Bills at the last auction from offshore portfolio investors and that is being linked to the outlook for emerging market currencies against the US Dollar.
The oil and gas sector has improved their output this year and the crude oil demand is expected to rise from current low levels. Long term outlook for crude oil is probably in the current region or lower as US shale oil production increases and starts exporting.
The level of official reserves has settled on a plateau of US$39.6bn this month but still provides nine months’ merchandise import cover.
CBN is faced with a tough situation once again as it sees Naira weakening despite interventions and sales from oil and gas companies. The policy on MPR of 12% may be set to be re thought if the exchange rate stability is to be maintained.
On the other hand the CBN could let Naira devalue but that would increase inflation and reduce disposable incomes of Nigerian consumers who have swallowed some bitter pills like the reduction in fuel subsidy.
With elections next year and the spending that will be incurred, it could be difficult for CBN to maintain the rate unless it raises the MPR even higher.