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Forex market panics as operators shun currency

Stock market recovery under threat
Nigeria’s Eurobond may suffer

By Babajide Komolafe & Michael Eboh
The rapid decline of the Euro prompted by the sovereign debt crisis in the Euro zone has occasioned apathy for the currency among foreign exchange operators.

Olusegun Aganga, Finance Minister

“Traders are beginning to say I don’t want anything to do with the euro”, said a senior bank foreign exchange dealer.
Meanwhile experts have warned that the euro debt crisis poses a major threat to Nigeria’s effort to raise $500 million through the proposed Nigeria Eurobond offer.
“The unabated sovereign debt crisis in the euro zone is putting a strain on the potential success and value of the planned bond”, said analysts at the Financial Derivatives Company Limited.
Also threatened by the crisis is the much awaited recovery of the Nigerian Stock Exchange (NSE), with some market operators already attributing the decline of the stock market since May to the impact of the Euro Debt crisis.

Since the Euro zone debt crisis broke last year, precipitated by Greek’s inability to meet debt obligations, the euro currency has depreciated by 21 per cent against the dollar. From $1.514 per dollar in November, the euro tumbled by 32 cents to $1.196 per dollar last week Thursday.

In the local currency market, the Euro has lost about 16 per cent of its value against the naira since the beginning of the year.

Exchange rates data published by the Central Bank of Nigeria (CBN) show that exchange rate of the euro fell to N179.516 per Euro in the official market from N213.4 at the beginning of the year, implying the Euro has depreciated by N33.9.

Without an end in sight to the decline of the Euro, this has caused serious apprehension for the euro in the local foreign exchange market. “People with euro assets are taking loses or hope it will recover”, a foreign exchange dealer told Financial Vanguard.

“Nobody in the market is comfortable with the euro because as it is, the debt crisis seems to be spreading. Only Germany looks stable but it cannot shoulder the problem of the whole euro zone as it has its own internal problems to battle with. As a result some people have gone to sleep with the euro. Nobody wants the currency because the way things are going it can do and undo you,” he said.
It would be recalled that two weeks ago, the CBN itself indicated it would reduce its euro reserves should the euro continue to decline.

“We have about 15 percent of euro in our portfolio and that’s enough to make us concerned. We don’t change because of short_term developments. If there are long_ term concerns then we’ll change it,” Mallam Lamido Yuguda, Director, External Reserves Management Department, CBN, said in an interview with Bloomberg in Abidjan , Ivory Coast .

Although economic analysts opined that the euro debt crisis do not have direct impact on Nigeria , they agree there are indirect impact, especially through crude oil prices.

Given that about 90 per cent of the nation’s export earnings and 70 per cent of government revenue comes from crude oil export, they point out that the impact of the crisis on crude oil prices is would undermine revenue projections for the year.  Already the euro crisis have caused a decline in crude oil prices from a high of $80.27 per barrel   in March to  $74.86 per barrel  last week.

This perhaps prompted the reported review of the 2010 budget through a supplementary budget sent to the National Assembly by President Goodluck Jonathan two weeks ago.

But apart from the effect of decline in crude oil prices government revenue, analysts believe that the 2010 budget might suffer another blow as a result of the euro debt crisis through the proposed $500 million Eurobond offer through which the federal government intends to fund the budget.

In the June edition of the Financial Derivatives Company’s bi-monthly Economic and Business Update, analysts at the company stated, “Expectations that a good chunk of the Nigerian budget will be funded with the proposed Eurobond issue are beginning to fade. Of a total projected budget deficit of $20.6billion (approximately 5_6% of GDP), about $500mn was expected to be sourced from the global market using the Eurobond.

The unabated sovereign debt crisis in the euro zone is putting a strain on the potential success and value of the planned bond. The 16_ nation currency, i.e. the Euro, reached a four year low of $1.22 per euro amidst heightened concerns that Greece and other European nations could snap and become unable to meet their debt obligations.

Euro denominated as_sets have lost significant value in the prolonged loss streak, a signal that it might be unwise to enter the market, especially as fears persist that the erosion of value is yet to bottom out. In view of the potential threats to deficit financing, the FGN will have to consider other funding sources in order to hedge risks.”

In addition to this, analyst said that the crisis poses a threat to the recovery of the economy from the impact of the global financial crisis.

“One of the way it could affect us is that foreign investors that should come and invest in Nigeria might not come again due to the euro crisis and this would slow down the economic recovery”, said a top official of Financial Market Dealers Association of Nigeria (FMDA), the umbrella body of  treasurers in the financial sector.

“The claim that Nigeria is insulated is now a myth – this reality became apparent in 2009 and it reflects the side effects of globalization. Nigeria is seeking to borrow from the euro and it will be impacted by developments in the world economy.

More importantly is the fact that Britain, Germany, Spain and France have all adopted austere measures which can have a positive effect on our market but the short term implication is the vagaries it exposes our market to as the investors from this regions take decisions”, said Mr. Femi Awoyemi, Analyst/Chief Executive Officer, Proshare Nigeria Limited.

Already, some capital market operators believe that the euro crisis is culprit behind the poor performance of the stock exchange in recent times.

As at June 10, 2010, equities’ value on the NSE, represented by the market capitalisation dropped by about N265.30 billion, representing a decline of about 4.15 per cent from the opening figure of May. In particular, the capitalisation which opened the month of May at N6.398 trillion closed, as at Thursday, June 10 at N6.133 trillion. The All_share index, another performance indicator, also dropped by 5.02 per cent within the period under review, to close at  5,214.18 points from 26.453.20 points.

“Several foreign portfolio investments in the Nigerian Capital Market originate from the Eurozone. As a result, local market watchers have started to link the current doldrums in the Nigerian Stock Market to massive sales by foreign investors adversely affected by the situation in Europe ,” said David Adonri, General Manager, Lambeth Trust and Investment Limited.

Though the European Union led by Germany and the International Monetary Funding are working round the clock to stem the tide to the crisis, the concerns among analyst is that there is little the local authorities can do to protect the economy from the likely impact of the crisis.

“It is very difficult for government or regulators to intervene administratively to stem the tide but correction materializes through the market mechanism under a favorable macroeconomic environment,” Adonri said.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.