Naira has 40% devaluation chance in 2012 on Oil Imports

“The weakening global economic outlook implies there is downside risk to the price of output.” 

Nigeria’s currency has a 40 percent probability of being devalued to 155 per dollar in 2012 on bets oil prices may drop and as the government increases investments in roads and rail, raising imports, Renaissance Capital said.

“The weakening global economic outlook implies there is downside risk to the oil price, so we are of the view that foreign reserves are likely to remain flat until the end of 2011 and the scope for a strong recovery in reserves in 2012 is now smaller,” Yvonne Mhango, a Johannesburg-based economist at Renaissance, wrote in a report today. The nation’s “infrastructure program implies that demand for imported capital equipment and machinery is likely to rise over the short-to-medium term.”

The central bank of Africa’s biggest oil producer has been using foreign-currency reserves to keep the naira within a 3 percentage-point band above or below 150 naira per dollar at its bi-weekly auctions to help check inflation. It has failed to meet lenders’ demand for foreign currency at 15 straight auctions.

The naira, which weakened 1.2 percent in August, was 0.1 percent stronger in interbank trading at 154.65 per dollar as of 10:44 a.m. in Lagos, according to data compiled by Bloomberg.

The nation’s foreign-currency reserves have slid 11 percent to $32.9 billion in the year to Aug. 26, according to data from the Abuja-based Central Bank of Nigeria. The country relies on crude exports for 95 percent of its foreign-exchange earnings.

Nigerian benchmark Bonny Light crude has risen 51 percent over the same period.

Naira Growth ‘Bellwether’

“Contrary to our initial expectation of a steady accretion of foreign reserves on the back of the sharp increase in the oil price in the first quarter 2011 and a sustained high price thereafter, foreign reserves have essentially moved sideways,” Mhango wrote. “Nigeria’s heavy import dependence explains the country’s high forex outflows. The country’s high import dependence explains why the exchange rate is often the bellwether for Nigeria’s economic health,” she wrote.

Finance Minister Ngozi Okonjo-Iweala said in an Aug. 12 interview that her priority will be to find ways to meet President Goodluck Jonathan’s goals of increasing investment in power plants, roads and agriculture to help diversify the economy and create jobs.

Nigeria needs fiscal discipline to help keep the inflation rate below 10 percent, after it slowed to 9.4 percent in July, from 10.2 percent a month earlier, central bank Governor Lamido Sanusi said Aug. 16.