The unrelenting fall in the price of crude oil is taking its toll on the currencies of oil producing countries, leading to either outright devaluation or heavy depreciation of such national currencies.
naira-Dollar
Companies in these countries that are exposed to foreign exchange denominated loans will be hard pressed to pay back those facilities as they are now compelled to source more local currencies to pay off such debt.
For companies with foreign inputs they will also be forced to source more local currencies at higher volume to continue operation. The Central Bank of Nigeria CBN, said it devalued the naira to stem the continued depletion of the nation’s external reserve which serve as backup for the local currency to prevent Nigeria returning to the pre-1983 era of foreign exchange rationing.
Pre-SFEM settlement
It will be recalled that in 1982 when former president, Alhaji Shehu Shagari introduced austerity measures as a result of shortage of foreign exchange in the country, the CBN could not provide cover for money paid by private sector operators into its account to settle foreign suppliers. The loans eventually became sovereign.
About N2.6673 billion was paid by importers into the commercial banks that awaited foreign exchange cover from the Central Bank. A large portion of the money had been paid into the banks in 1983.
At the time, about N1.4285 billion was paid to the Central Bank, while the balance of N1.2388 billion which represents the advanced deposits paid by importers against letters of credit was outstanding with banks.
The backlog was caused by foreign exchange scarcity, which hit the country as the nation’s reserve was depleted and could not pay for one month of imports.
Accordingly, CBN could not provide foreign exchange to facilitate the transfer of the money to overseas creditors before the introduction of the Second Tier Foreign Exchange Market (SFEM) in 1986. The hike in exchange rates put the importers who had already settled their bills in difficult position as they were being asked by their bankers to pay the new rates.
The importers, however, insisted that it was not proper for the banks to ask them to pay the prevalent exchange rates. According to most importers then, they paid in the N2.6673 billion into banks when the exchange rate was about N1.00 to $1.00.
But with the devaluation of the naira, the Central Bank issued a guideline in which the settlement rate was fixed at the rate ruling as at September 26, 1986 of about N1 to $1.5, and importers were asked to pay the difference which, according to financial experts, amounted to N1.332 billion.
Nigerian banks’ quest for foreign bonds over
In the present circumstance, Nigerian banks’ that have in recent time been rushing to the international capital market to raise funds will have to think twice before doing so.
The overseas borrowing fiesta looks to be over in the wake of dramatic currency devaluation last week, but while risks are rising, repaying existing debt could be a problem for most.
Nigerian companies have rushed in recent years to take advantage of rock-bottom global borrowing costs and investors’ hunger for yield, selling some $5 billion in hard currency bonds since 2007, according to Thomson Reuters data. Of this, more than $2 billion was raised this year by financial institutions shoring up their balance sheets, Standard Chartered estimates.
Oil producers’currencies in trouble
The oil price collapse has prompted currencies of oil economies from Nigeria to Malaysia to hit multi-year or all-time lows. In Russia, where energy accounts for two-thirds of exports, the rouble slumped 1.2 per cent and headed for its biggest monthly loss since 2009.
Moscow’s dollar-denominated stocks fell 2.6 per cent, set for their fifth month in the red. Russian bonds were also sold off; with dollar debt spreads over U.S. Treasuries at three-year highs and local 10-year yields surging to levels last seen in December 2011.
“The market reaction is very conventional. We see divergence between the winning countries over the decline of oil prices and the losing countries,” HSBC strategist Murat Toprak said. The rouble has overshot – but if the oil price keeps going lower like that, this momentum may continue.” Three-month forwards meanwhile imply a 10 per cent depreciation in oil-rich Kazakhstan’s Tenge. More @ http://www.vanguardngr.com/2014/12/currencies-nosedive-oil-economies/
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