Nigerian Naira Drops as Central Bank Seeks to Preserve Reserves

By Garth Theunissen

Dec. 4 (Bloomberg) -- Nigeria’s currency is sinking as Africa’s biggest oil-producing nation seeks to preserve its foreign exchange and restrict the supply of dollars.

The naira, down 9 percent this year, may weaken 4.7 percent this month to 135 per dollar, said Rubens Iwakura, a London-based currency trader at BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg survey. The Central Bank of Nigeria limited sales of the U.S. currency to as little as $100 million this week from more than $800 million at a sale last month, even as banks demanded more than $1 billion, Citigroup Inc. said.

The limits threaten to seize up foreign-exchange trading as falling commodities prices reduce income from oil exports, said Michael Hugman, an emerging-markets currency strategist at Standard Bank’s London office. International cash reserves dropped 4.3 percent to $55.9 billion in November, the central bank said yesterday. The naira was unchanged at 129 per dollar, traders said.

“There’s a difference between achieving a more competitive exchange rate and the disappearance of the foreign-exchange trading market,” Hugman said.

Banks demanded $1.3 billion of the U.S. currency in a Nov. 26 auction, 12 times the amount sold, according to Standard Bank. The central bank sold $180 million in foreign reserves yesterday to commercial banks, according to Standard Bank, Africa’s biggest lender.

Bids

Policy makers also won’t disclose the rate of exchange at which bids would take place in local currency, making banks reluctant to participate in the auctions, said Leon Myburgh, a fixed-income and currency strategist for sub-Saharan Africa at Citigroup in Johannesburg.

The naira dropped to 129 per dollar from 117.83 on Nov. 26, when the central bank first reduced the amount of dollars sold, according to Citigroup.

Central bank officials were in meetings and unavailable for comment, according to the bank’s switchboard in the capital Abuja.

Oil production in the West African country will drop to 2.29 million barrels a day next year from 2.45 million barrels in 2008, Nigerian President Umaru Yar’Adua said this week. Crude accounts for about 80 percent of government revenue and 90 percent of exports.

Oil prices have tumbled 68 percent since reaching a record $147.27 on July 11.

Dollar Demand

Banks’ demand for dollars has increased as investors pull out of emerging-market assets amid the worst financial crisis since the Great Depression. Nigeria’s benchmark stock index is headed for its first annual decline in nine years after falling 46 percent, according to data cited by stock exchange spokesman Sola Oni in a telephone interview from Lagos, the nation’s commercial hub.

“A lot of foreign investors are exiting the country, which has generated huge demand for dollars,” said Iwakura at BNP. “If the central bank continues to disappoint the market by limiting dollar sales it could precipitate further weakness in the currency.”

The central bank’s “lack of transparency” in signaling to banks the amount of dollars it is willing to auction has made traders reluctant to participate in auctions, said Myburgh at Citigroup. “That’s a big reason why interbank trade has ceased to function properly,” he said.

The naira may weaken to 140 per dollar by early next year should Nigeria’s central bank continue to limit the supply of dollars to commercial banks, Myburgh said.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net