Staff Writer
After the central bank governor was fired over the weekend, Nigeria’s foreign debt increased, which will help the country’s new president follow through on his vow to change the monetary policy that has been credited with ruining Africa’s largest economy.
After the markets closed on Friday, President Bola Tinubu suspended Godwin Emefiele. The Nigerian state security service then detained him the following day for what they described as “investigative reasons.” In an acting role, Folashodun Shonubi, a deputy governor in charge of the bank’s operations, will take control.
The longest-dated dollar bonds issued by Nigeria rose to their highest level since January at the opening of trading on Monday, outperforming peers in other emerging markets. As of 8:05 a.m. in London, the price of the 2051-dated notes increased by almost 3 cents on the dollar to reach 73.42, the most increase since April.
According to analysts, Emefiele’s dismissal should result in stronger Nigerian bonds and maybe higher benchmark interest rates as foreign investors become more interested in the country’s assets. A multiple exchange rate system being abandoned will probably result in the naira’s devaluation.
As his unconventional policies have become a hindrance for Nigeria, the market will view Godwin’s dismissal as a positive step, according to Ronak Gadhia, director of Sub-Saharan banking research at EFG Hermes, in an email.
His dismissal should be perceived favorably and should enhance interest in taking on risk in Nigerian bonds and stocks.
As the CBN works to control inflation, “a more norMalized and conventional” approach “should result in higher interest rates in the short term,” Gadhia continued.
Investors, economists, and organizations like the World Bank had long criticized Emefiele’s policies, which included supporting the naira, limiting foreign exchange for dozens of imports, and emphasizing development finance.
The government was also given a 22.7 trillion naira ($49 billion) loan by his central bank, which contributed to the nation’s record-high public debt of 77 trillion naira.
Ayodeji Dawodu, head of Africa sovereign and corporate credit analysis at BancTrust & Co. in London, stated that this might mark the end of unconventional and frequently incongruous and confusing monetary policies that stunted economic growth and eroded confidence among domestic and foreign investors.
Detention and Suspension
Emefiele was commonly perceived as operating in lockstep with Tinubu’s predecessor Muhammadu Buhari’s administration.
Yemi Kale, a former statistician general and top economist for Nigeria at KPMG LLP, remarked that the previous administration was seen as having a more statist and socialist philosophy.
The markets will react favorably to an administration they see as being more focused on the market, according to Kale.
During his inaugural speech on May 29, Tinubu lambasted the nation’s central bank and vowed to impose a single exchange rate system in order to “direct funds away from arbitrage into meaningful investment in the plants, equipment, and jobs that power the real economy.”
Under Emefiele, Nigeria’s central bank provided small amounts of liquidity to businesses and individuals through a number of windows at strictly controlled rates for US dollars.
Many were compelled to turn to the illicit market, where the dollar traded more freely but at a price that was almost 60% more than the going rate.
Ayo Salami, chief investment officer of Emerging Markets Investment Management Ltd in London, stated via email that “the departure of Mr. Emefiele is likely to be positively viewed by markets as a signal of a new policy direction in Nigeria.”
“The implementation of policy changes would most likely require a new team in order to be credible.”
Deflation of the Naira
JP Morgan stated in an investment report on May 31 that the current naira exchange rate, which is at a record low of 471.92 naira to the dollar, likely needs to be modified to between 700 and 750 naira, which is more in line with the current black market rate.
“Our baseline expectation is that an adjustment to these levels is likely, barring significant upside to oil prices or production,” the bank stated.
The naira has lost value for three straight days, which is the biggest losing trend since May 12. Analysts predict that the naira might trade between 650 and 750 naira to the dollar if Nigeria permits more open foreign exchange trading.
Due to Monday being a Nigerian public holiday, domestic trade will not be conducted till Tuesday.
A naira at that level “means the government does not have [to] borrow as much, just to pay interest on debt,” Charlie Robertson, head of strategy at FIM Partners, said in a series of tweets. Tinubu’s decision to eliminate an expensive gasoline subsidy is also a factor.
