Nigeria: Devaluation of the Naira due to dropping oil prices

Event

Nigeria devaluated its local currency by almost 10% and increased its benchmark interest rate for the first time in three years to a record 13% (up from 12%). Over the past three months, oil prices went down roughly with 30% due to rising US shale supply and weaker global demand (especially from China).

The drop in oil prices made it difficult to keep defending the Naira through selling foreign exchange reserves, as 76% of Nigeria’s hard currency earnings come from crude oil exports.

Impact on country risk

As a consequence of the plunge in foreign exchange reserves since the softening oil prices, the Central Bank of Nigeria decided to devaluate the Naira instead of defending its value at the cost of reserves tumbling deeper.

Due to years of corruption and deficient transfers of oil revenues to the budget, the ‘excess crude account’ and financial cushion against an oil price shock are disappointing. The devaluation and subsequent negative impact on inflation can be politically harmful for President Goodluck Jonathan in the run-up to the fiercely contested February 2015 general elections.

Moreover, as the government depends for more than 65% of its revenues on oil proceeds, budgetary cuts and prospects of subsidy reductions in the coming months might further deteriorate the ruling party’s position and lead to protests.

Credendo Group ,  Louise Van Cauwenbergh