Delta trading

Nigeria's currency still looks vulnerable

Nigeria's currency remains vulnerable. The central bank said on February 18 it would defend the naira at 198 per dollar, after a 22 per cent drop since September. But Africa's biggest economy is beset by political strife, corruption, poor infrastructure and plunging revenue from oil exports. The former star "frontier market" is in a tight spot.

It's not long since Nigeria was exalted by Templeton's Mark Mobius, the acronym-touting Jim O'Neill, and other Davos types. In mid-2013 a $1 billion bond sale, including 10-year bonds yielding just 6.625 per cent, was four times oversubscribed. That looks blase now. Those bonds trade at 93.25 per cent of face value. And while the naira's fall looks modest compared to, say, the rouble, Nigeria has reason to worry about a self-reinforcing decline.

The vulnerability has many causes. Recalculated economic statistics last year revealed an 89 per cent increase in GDP, and years of six per cent growth. But optimism could easily give way to disbelief. The figures don't tally with much of the evidence. For example, McKinsey Global Institute researchers say Nigeria generates one-fifth as much electricity per person as India, for supposedly the same GDP per person. Nigeria is probably much poorer than the new numbers suggest.

Meanwhile, the government has delayed the presidential election by six weeks. That in itself is worrying. But even if the vote goes ahead, and even if Boko Haram Islamist rebels in the northeast are subdued, the nation's deep divisions and weak administration will remain.

Then there is oil. Energy still accounts for 90 per cent of exports and 75 per cent of federal government revenue. To make things worse, production has been falling, because the government cannot negotiate fair contracts, keep workers safe or restrain theft.

Consider too that the trade surplus was falling even before the oil price hit bottom, and that the central bank spent 28 per cent of its foreign currency reserves in the last year.

Add it up, and the naira risks falling victim to a nasty cycle of devaluation, domestic inflation, and diminished confidence.