Aah the Dollar Naira Question

So i have found a good write up on the question we pondered a few days ago, primarily the reasons for the dollar declining drastically from a high of close to N230 to N197 within a week or so. Our good friend (imaginary friend) over at Nairametrics explained it. This isn’t a sponsored ad, Nairametrics was one of the sites i used to learn about the Nigerian Stock Market. It is devoid of a lot of the rubbish speak and gets to the point. Enjoy.

One major reason why the Naira gained this week at the black market

 

Nigerians woke up Thursday still basking in the excitement of the successful conclusion of the 2015 presidential election. Many are riding on high hopes that things will soon start to turnaround. By Thursday mid-day, the NSE All Share Index was up by 8.5% closing at its highest one day gain ever (8.3%). In fact, the Stock Exchange posted the highest gain in the world.

The hysteria around the election success did not only end with stocks as the parallel market for forex surprised many with its own fair share of the ‘Bullhari” bounce. The price of the Naira had suddenly crashed from a high N220 in the black market to under N210 by Thursday evening. A few calls to black market operators on Friday also suggest the price was now under N210 and some say it is even likely to sell for under N200. So why is the price of the dollar suddenly dropping?

Over supply

Feelers we got from a few black market operators that we called suggest the market is currently over supplied. They claim there is so much dollars making the round now and with fewer naira chasing it. One might view these reason as basic considering that it is coming from black market operators also called “Aboki’s”. However, that will be foolhardy as the same guys had informed this website back in November that the naira was indeed heading for N200 when that appeared unthinkable at the time. They claim the market is currently dominated by more sellers of dollars than buyers.

Having gotten an explanation for the sudden depreciation, the next question is why the oversupply? Here is our thesis

Election Euphoria – The election has come and gone and Nigerians are ecstatic it ended peacefully and without skirmishes. Many had been nervous about the potential for the election to spill into uncontrollable violence and as such stashed up dollars in anticipation of the worst outcome. Now that the election turned out well and uncertainty out-of-the-way, the economy is witnessing a post-election bounce. For example the stock market gained over 11% between Wednesday and Thursday as many investors suddenly realised how cheap stocks were and decided to take positions. Some investors liquidated their dollar holdings in exchange for naira and poured it into stocks. Some also opine the “Aboki’s ” who sell dollars are still well into euphoria mode and are also now converting their dollar hoard into Naira bearing in mind that “one of their own” will be president.

Naira obligations – Just as Nigerians were circumspect about the impending elections, many businesses also felt the same way. Some of them fled the naira for the dollar as a hedge against further depreciation should things go bad post-election. Whilst that made sense on the short-term, the long-term problem that created was that many businesses perhaps soon ran out of naira and could not fund naira obligations. Add that to the positive mood in the country they have no choice than to liquidate some dollar holdings to fund naira obligations.

Dollar obligations – The huge depreciation of the naira earlier in the year has also made a lot of people either cancel their dollar obligations or simply deferred it. For example, those who probably planned to buy cars from overseas or go on expensive holidays changed plans when the naira depreciated beyond control. Some of them have probably still not decided to come back.

Cash crunch – Despite Buhari’s win the economy is till in bad shape and many businesses and ordinary Nigerian can feel the cash crunch. Prices of goods and services have also gone up further eroding the disposable income available to most Nigerians. Add that to the post-election bounce and you get fewer people spending their little cash on hoarding dollars.

CBN policies – the CBN introduced policies akin to capital controls in the wake of the speculation that had contributed to the depreciation of the naira. They had tried as much as possible to close the round tripping loop between the interbank and black market forcibly stifling any inkling of an artificial creation of scarcity.

Will the naira remain strong?

We believe the days of N160-170 are not coming anytime soon as the quartet of oil price plunge, dwindling government revenue, low external reserves and thirst for high imports remains an issue. The interbank market is still relatively flat and did not witness any major post-election bounce. Analyst also opine there is still pent-up demand for dollars with limited supply that could still posse a significant risk for further devaluation. For example, our external reserves s thought not to be enough to meet up to the acceptable 6 months import bill.

Despite the above, we believe it is still early to project if the naira will continue to remain strong. Based on current over-supply the black market will continue to undergo a correction that will see the naira trade between N200 to N210 to the dollar. This off course depends on whether the CBN will still go ahead with devaluation and/or loosen up some of its tighter controls. The potential impact of the election transition going smoothly as well as the vibes from the APC is also a huge factor.

 

Source: http://nairametrics.com/one-major-reason-why-the-naira-gained-this-week-at-the-black-market/

NESTR
OAD

 

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5 Comments on Aah the Dollar Naira Question

  1. Good infomatics. I will visit this site more to get updates.

    Thanks

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  2. Cool info. Anoda reason for d dollar influx could be dat politicians shared dollars prior to d election to members of d electorate as campaign measures

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  3. Good information. You can also check out aguntasolo.com, he has informative posts on dollar exchange and Nigeria’s economy.

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  4. Wish so many people can read this,so we can rest on this their ‘change’ chants… Good information.

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  5. Good read. My best websites for naija economics are naijanomics and aguntasolo. These two guys make economics seem like bread and butter 🙂

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