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Emefiele Goes Malaysia Way In Bid To Keep Dollar Peg

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Nigeria's Central Bank (CBN) Governor Godwin Emefiele's unorthodox policies aimed at maintaining the naira's peg to the dollar, amid a global commodity rout and analysts calls for a devaluation mimics Malaysia's response to the Asian financial crises of 1997.

Malaysia's then-leader Mahathir Mohammad, saved the country from the worst ravages of the Asian financial and currency crisis when he imposed capital controls, pegged it and waged verbal war against speculators.

Today, Emefiele seems to be playing off the same script, including tightening of monetary policy and FX rules, as well as the de facto ban of 41 imports, limiting daily withdrawals by Nigerians with Domiciliary accounts, pegging the naira firmly against the dollar at N199 on the interbank and vowing that speculators betting on a devaluation will lose their shirts.

The IMF, which called Malaysia's response “a step back” in 1998, later acknowledged it was a “stability anchor,” in 2002. Emefiele may eventually be vindicated as the naira remains steady as most African and Emerging Market currencies collapse from the ongoing global selloff.

“Over the long term, the Central Bank (CBN) Governor's stance will be well justified as NNPC begins to remit more dollar earnings and savings from the elimination of importation of refined crude (at least some decent share of daily PMS demand will be refined locally) increases,” said Abiodun Keripe head of research at Elixir Investment Partners Limited in response to questions.

Renaissance Capital economist Yvonne Mhango in a note released last Thursday called for a 15 – 20 percent devaluation of the naira to N230/$ by year end 2015.

Albert Essien, chief executive officer of Ecobank Transnational Inc, said last week that the CBN should move to a managed currency float. Other analysts including Bernd Berg of Societe Generale SA, believe the CBN would be unable to maintain its dollar peg, after Kazakhstan was forced to abandon its own peg, due to falling oil prices.

However, some factors which the analysts may be missing are the political cover the CBN is getting from Nigeria's new President, Muhammadu Buhari, (who is historically loathe to naira devaluation), and the prospects of improved CBN dollar reserves accretion due to the renewed anti corruption drive.

The CBN's dollar reserves are up 6.5 percent since Buhari's inauguration on May 29.

“The naira has remained an outperformer among frontier-market and SSA currencies in the recent past, given its heavily-managed nature. This was evidenced by the naira's nominal resilience during black Monday (24 August) when the whole EM and SSA FX universe sold off,” Samir Gadio, Head, Africa Strategy and FICC Research at Standard Chartered Bank said in response to questions.

“But this is mainly because the exchange rate in Nigeria is not marketdetermined, while such outperformance takes place at the expense of significant FX demand-supply mismatches onshore.”

The fundamental differentiating feature of the USD-NGN market remains Nigeria's extreme dependence on oil which accounted for 95 percent of FX earnings prior to the crisis, according to Gadio.

The CBN has so far resisted moves to devalue, even as Brent crude prices fell below the $45 dollar mark on Monday.

“We haven't seen any reason so far to institute a change in the foreign exchange policies,” Ugochukwu Okoro, a spokesman for the CBN, said last week.

While the global risk off sentiment has failed to show up in the naira dollar level, Nigerian equities are down some 15 percent year to date, while Nigerian Eurobond yields soared to record highs on Monday, according to Bloomberg data.

There is also the problem of significant FX demand-supply mismatches which the CBN has yet to adequately address. One example of such is MTN Group Ltd., which abandoned plans to repay early debt of about $500 million held in Nigeria, saying it can't get hold of dollars in its biggest market.

“The Central Bank cannot continue to devalue the naira as this really does not solve the problem. However a more permanent solution will be to eliminate structural bottlenecks that allow for speculation and then clear market FX demand backlog, which is just what the CBN is doing,” Keripe said.