Crude oil Brent price closed the month dropping to $25 per barrel recording its largest monthly drop in decades. Nigeria’s Bonny Light performed worse, falling to as low as $21 as the country grapples with unsold crude oil cargoes.
The oil price crash is piling pressure on a number of pegged currencies in energy-exporting emerging countries, such as Nigeria, with a currency that has already fallen to historical lows in forward and spot currency markets. The COVID-19 pandemic and the oil price battle between Saudi Arabia and Russia have turned to a bitter pill for developing countries like Nigeria hitting their revenues and threatening a recession.
Against this fallout, oil-exporting countries with a fixed currency rate to the U.S. dollar are back in focus as investors forecast a currency rout in the coming months. Central banks of emerging markets have largely dumped the idea of a currency peg instead of preferring to allow devaluation to be channeled through currency exchange rates, enabling them to preserve their foreign currencies holdings. Countries like Egypt, Angola, Uzbekistan, and Venezuela have all recently weakened their grip on currencies. For those who prefer to peg their currencies, it is important to have a strong-firepower to defend currency peg levels.
Nigeria depends on crude oil earnings for about 90% of its foreign exchange but the country’s FX reserves plunged by more than $1.6 billion to $36.38 billion in March 2020. With foreign reserves plunging almost 20%, Goldman Sachs estimated that Nigeria needed a currency almost 40% weaker if Brent prices stay at $30 a barrel.
In addition, foreign investors held about $8 billion of Nigerian debt, JPMorgan Chase estimates. If some of these investors withdraw their funds in the coming weeks, Nigeria’s foreign reserve levels could fall below $30 billion psychological floor, a level many suggest could trigger another round of devaluation.
The CBN recently said the market fundamentals did not support a devaluation of the naira but the currency markets are showing signs of the naira has been depreciated. Nigerian non-deliverable currency forwards raced higher last week with the one-year contract showing a dollar-naira rate of 515 to the dollar.