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September 24, 2021

Nigeria's Inflation data stood at 17% which literally means that the purchasing value of Nigerians has weakened and declined by 17%. A quick comparison of inflation data with other countries – Saudi Arabia is at 0.4%, the United Kingdom is at 3.2%, and in the United States, it’s at a “transitory” 5.3%.

In order to preserve the value of their hard-earned money from devaluation, Nigerians are finding different means or investment vehicles to preserve their money. They want their 100,000 naira to be 100,000 naira on a Month-on-Month basis.

The common trend now to achieve this is to “buy the dollar and preserve their naira earnings.” While in theory, this sounds like a well-thought-out plan or hedge as we call it in finance, there are certain flaws to it. Engaging in this form of hedging – inadvertently makes one a currency trader vulnerable to volatility.

Foreign exchange rates can change rapidly in response to any real-time economic and political events. The tendency to always buy at whatever price will possibly lead you to buy at high prices and when it hits a negative inflection point – the purpose of “preserving value” is defeated.

The fundamentals appear to be changing soon. There are signs the Nigerian economy would soon be supplied with dollars.

  • Nigeria has announced plans for another visit to the global market through the issuance of a $6.2 billion Eurobond in October. JP Morgan, Goldman Sachs, Citigroup, and Standard Chartered have already been selected as international book-runners for the Eurobond issue alongside local firm, Chapel Hill Denham.
  • Access Bank Plc’s recently oversubscribed $500 million Unsecured Eurobond that drew interest from top-grade investors globally should bring optimism that investors will rush the Federal Government Eurobonds.
  • The recent $3.35 billion Nigeria received from its share of the IMF’s SDR (special drawing rights) has boosted the country’s dollar liquidity.
  • President Buhari’s recent request for a $4 billion loan, which has been heavily contested, is likely to fly as it could get approval from the Senate, where his party is in the majority. 
  • Additionally, there have been indications that Indian refiners, Nigeria’s largest buyers of oil, are increasingly boosting run rates amid newfound confidence that there will be a revival in oil-products demand. The information in the market is that some refiners are planning to lift runs to 100% of their capacities for the rest of the year. With oil at $74-75, it’s a good time for Nigeria and Nigerians.
With the possibility of liquidity support coming in and the Central Bank clampdown on speculative website “abokiFX” – artificial prices will soon flesh out and the intrinsic value of the Naira to the dollar will appear.

Herein lies the need for introspection of the “currency conversion” practice.

In investing, there are three principles to use as guidelines.
  • Investment objective
  • Risk appetite
  • Investment horizon
Investment Objective
In this particular case, the investment objective of many Nigerians is to preserve their earnings in foreign currencies. They just want value – not profit necessarily. Any “profit” is just a bonus for their venture. Every year, Morgan Stanley picks the year’s best safe-haven currencies. The U.S. dollar was picked in 2020 as the best safe-haven currency. The Japanese yen and Swiss Franc are relatively mentioned as safe bets.
Risk Appetite
The risk appetite envisages the investor’s risk tolerance. Can Nigerians afford to handle the volatility of currency movements? Would they be perturbed when they realize they bought at the top as the naira appreciates? A quick glance at the Central Bank’s Data on the monthly exchange rates over the last few years will corroborate the dangers of buying USD every time, especially in the height of speculation frenzy.
According to historical data in 2016, US Dollars went from N396.15 to N431.10 at the black market from the 8th month to the 9th month. It then reached its peak in the 2nd month in February 2017 after sustained levels in the N400+ zone. Suddenly, it will be observed that a 64 Naira decline happened the following month ( March 2017) before prices returned to the N300+ levels in the following months.

If you panic invested in that period, you would have bought at the top and realized you were overpaying for a currency you did not need at that time. Trading on noise breeds a tendency to buy when prices are high and sell when prices are low. So if you bought dollars in February 2017, you would only be breaking even in the second half of 2021.

Investment horizon
Investment horizon refers to either a short time or a long time horizon. In the short term, where there’s a need for personal liquidity – engaging in hoarding dollars or speculative trading is riskier than in the long term horizon. Using historical data one with a liquidity need would have sold his dollars at a lower price. The value of one’s earnings would have suffered the double whammy of loss in dollars and the inflation one ran away from. In a longer time horizon, time would smoothen volatility.

In the cryptocurrency space, Nigerians are trading Naira for USD(T), USD(C), and BUSD in peer-to-peer transactions. The above coins are referred to as stable coins “pegged” to the dollar. According to data found on Paxful and Local Bitcoins, using a 90 day period – Nigerians traded $115,077,936, the highest volume of transactions recorded in Africa. This excludes data from Binance, a more popular cryptocurrency exchange. Peer to Peer transactions (P2P) appears to be the sophisticated way Nigerians are engaging in currency swaps.

Analyst View
The devaluation value of the Naira to the USD and other foreign currencies is of concern to all because is way too high at N575/$1. Many people are of the opinion that the Naira will still exchange above N600/$1 before the end of the year. However, the inflexion point at which the Naira will start to steadily appreciate against the dollar is a moving target and may soon begin with all the stated efforts.

You don't want to be caught carrying the can, that is why short-term speculators of an uptrend in the value of the Ngn/$ may soon be at risk. The Naira exchange rate is too high for the health of the Nigerian economy and her citizen, something will have to give way and be done fast before the biggest economy in Africa descends into the abyss.

SOURCE: Nairametrics