Nigeria Takes First Bold Step Toward Hyperinflation As Currency Plunges 30%

Tyler Durden's picture

As we warned last week was likely, Nigeria's decision to throw in the towel on maintaining its currency peg has resulted in a collapse in the Naira. Ending a 16-month-long effort to 'fix' its currency, Nigeria's shift to a free float has resulted in a 30% crash in the currency as the central bank began auctioning dollars to try and clear backlogs of orders for hard currency. However, as the forward market suggests, the pain is far from over as the hyperinflationary endgame remains more than likely.

The Central Bank of Nigeria used capital controls to stem an outflow of dollars after the naira crashed to a then-record in February 2015 as oil prices slumped. While stabilizing the currency, the controls deterred foreign investors and starved manufacturers of foreign currency needed to pay for raw materials and equipment. Nigeria’s gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to an almost six-year high of 15.6 percent in May.

The shift to a free float, however has resulted in a collapse from 200 to around 260 Naira to the US Dollar...

And, as Bloomberg reports, there may be “higher volatility until the market becomes more functional,” Samir Gadio, head of Africa strategy at Standard Chartered in London, said in an e-mailed response to questions.

“Foreign investors will need to be convinced that the new foreign-exchange platform is sustainable before they resume the purchase of local assets.”

Few trades went through in the hour or so after the market opened, making it hard to tell what the naira’s fair value is, according to Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. The central bank seems to want to stabilize the currency at around 250-260 per dollar and most local banks will be nervous about pushing through trades much weaker than that, he said.

While allowing the naira’s exchange rate to be “market-driven,” the central bank would intervene when necessary, Governor Godwin Emefiele said when he announced the new system on June 15.

“I think it will move to 300 at some stage,” Thompson said by phone. “There’s all that pent-up demand. But you don’t want to be seen by the central bank to be pushing it lower. It won’t sit well. There’s a bit of moral suasion to keep it here. But as the client orders come through, the banks will have to pay up to supply their clients.”

Forwards markets suggest the depreciation has much further to go. Three-month naira non-deliverable forward contracts rose 0.3 percent to 321 against the dollar, while one-year contracts climbed 0.6 percent to 356, heading for a record close.

For Nigeria's 175 million-strong population, this means that Nigeria is about become the next Venezuela, with imminent hyperinflation on deck, as prices soar to keep up with the collapse in the spot rate. 

Of course, what is bad news for the population is great news for capital markets as the "devaluation as a bullish case for stocks" arguments spew forth. Stocks always surge as a country is about to tumble into the hyperinflationary abyss. The question is whether the nominal price increase will keep up with the all too real collapse in the Naira's purchasing power which is about to slam Nigeria. If Venezuela is any indication, the answer is no.

Finally, for those wondering how to trade here, the answer may once again revolve around the Niger Delta Advisors: if Nigeria is unable to export more oil due to supply disruptions and thus inject much needed dollars into its Treasury, the country's financial situation wil get even more dire, leading to an acceleration in the naira's devaluation.  On the other hand should Nigeria's government be successful in taming its offshore funded militants, the naira may be a buy, however that trade would be offset by a short in oil as the world's most acute crude supply disruption comes to an end.

In any case, watch out for unsolicited Nigerian emails from financially erudite locals asking you to buy stocks, bonds, or any other asset class. Those will result in guaranteed losses.

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Looney's picture

 

Nigeria could skip the foreplay and… peg its currency to Zimbabwe’s.  ;-)

Looney

ParkAveFlasher's picture

Just got Gartman's newletter from yesterday, he was long Naira!

Bryan's picture

Does inflation work with email scams too?  So now we'll get mail from our good friend and confidant, DR CLEMENT OKON, requesting top secret assistance in transferring 12 Godzillian Naira ($12.95 US TWELVE DOLLARS AND NINETY-FIVE CENTAVOS) of the evil governments withholdings overseas to a safe account, and get to keep 10% of it for our trouble (PLEASE REPLY SOON DEAR)??  Woohoo.

Jack Oliver's picture

The OIL curse strikes again !

Dubaibanker's picture
Currency wars escalate: Nigeria allows free float by depreciating massively causing billions in losses

 

List of countries whose real estate, fixed deposits, traders (exporters and importers) and all foreign investors etc have lost billions overnight continues to rise:

1. Switzerland in Jan 2015

2. Egypt throughout 2015 and 2016

3. Venezuela throughout the last decade

4. Azerbaijan throughout 2015 and 2016

5. Ukraine since 2014

Above are some of the countries who continued their fixed currency policies and most are now plunged into deep crises and have lost a lot in value since they started depreciating their currencies but did become more competitive on the export front.

Today, Nigeria has become the latest country where billions have been lost for all the people mentioned above who devalued their currency by a large amount and since the currency has been allowed to float, expect more depreciation over the weeks ahead....

The ones who have free floating currencies but have depreciated vigorously and continuously over the last 2-3 years are:

1. Malaysia

2. Brazil

3. Mexico

4. South Africa

5. Russia

6. Australia

7. Canada

8. Algeria

9. Ghana

10. Angola

etc

We cannot do much but watch our values of assets depreciate ....while local and foreign investors can watch their asset values depreciate .....while importers must watch their sales plunge.....

Welcome to currency wars where no one wins and everyone loses!

Naira diminish in free float


http://www.pmnewsnigeria.com/2016/06/20/naira-diminish-in-free-float/

Nigeria’s Naira Slumps as 15-Month Currency Peg Ends in Lagos

http://www.bloomberg.com/news/articles/2016-06-19/naira-seen-tumbling-in...

War Machine's picture

isn't the loss of 'billions' really basically a correction to something like a more accurate valuation, and if so, was it truly 'wealth' that was lost or something else?

just asking, I'm just trying to get my mind around how so much $$$ is "lost" based on a change in how currency is valued...

Dubaibanker's picture

Holder of real estate loses the money if he is a foreigner.....because in USD terms it still holds value but not in local currency terms....

Someone received the money, so yes, they still have the money but if it is inside the nation, then they too will "lose" it. But only if its outisde the nation, that someone "made" money.

Overall it slows down dramatically the wealth creation process and brings money into the people at the very top form the pocktes of the masses....or people who still can continue to operate in a domestic market as compared to exporters/importers who will suffer a lot.

It is not as simple as a zero sum game because beneficiaries are very few if they hold assets in USD and losers are plenty who hold assets in local currency.

Look at Venzuela.....or Zimbabwe...who would you say are the inners? No body!

Currency wars are bad for everyone! There are no winners but only less losers who have humongous assets especailly "real" assets like real estate or businesses or even gold maybe ......and lot of luck or solid political ocnnections to navigate a crisis and ocme out even...but then no one has come ut of Zimbabwe or Venezuela as further ahead!

All of this is linked to debt from US or IMF or World Bank etc who have greater control over such weak nations.....whom have been lent a lot of money....

But who is to say that they will be able to collect the debts so it will come to bite them...hence most countries want real assets which is what China has been doing over the last several years......

Antifaschistische's picture

1. Switzerland in Jan 2015 (darn, I should have bought gold)

2. Egypt throughout 2015 and 2016 (darn, I should have bought gold)

3. Venezuela throughout the last decade (darn, I should have bought gold)

4. Azerbaijan throughout 2015 and 2016 (darn, I should have bought gold)

5. Ukraine since 2014 (darn, I should have bought gold)

6. Malaysia (darn, I should have bought gold)

7. Brazil (darn, I should have bought gold)

8. Mexico (darn, I should have bought gold)

9. South Africa (darn, I should have bought gold)

10. Russia (darn, I should have bought gold)

11. Australia (darn, I should have bought gold)

12. Canada (darn, I should have bought gold)

13. Algeria (darn, I should have bought gold)

14. Ghana (darn, I should have bought gold)

15. Angola (darn, I should have bought gold)

16. ________

Dubaibanker's picture

Darn...you are right.....but how could you have travelled to so many countries....converted all your money into a local currency because many don't allow....and then bought gold?.....and then how would you have got the gold out....?

Just asking...for a friend....;)

But you are right.....however in the short run no one makes money out of gold but in the long run perhaps yes....

ACES FULL's picture

I think he is saying what citizens of each of those countries should be thinking,not himself.

Dubaibanker's picture

Fair enough, I missed to look that way. My bad.

Howveer, gold has been going down for 4 years and the people who run this world dont hold much gold but they do hold real assets like businesses, real estate, cars, yachts etc and will not let their prices go under.....so there is that! 

Antifaschistische's picture

Gold is not a substitute for owning your own plumbing business, or restaurant, or whatever.  Business create wealth.  I get that.  Gold is only handy because of it's portability...when it comes to fiat currency collapses you could own aluminum, or lead, or copper, etc...but at some point storage and transaction costs get prohibitive.  Gold is also not a substitute for real estate...but in some places, real estate taxation also makes it a liability unless you're using it to make money (e.g. farming)

css1971's picture

You have it backwards. There are short term fluctuations that you can take advantage of, or lose money on. Over the long term though it reverts to the mean. It will maintain your value. But no more than that.

War Machine's picture

perhaps China will sell more treasuries to buy up Nigerian email scam companies.

But, as its around half Muslim and half Christian, what 'the company' will likely do is some good old fashioned civil war engineering. Arm both sides. Come in later with loans and development promises from US oil companies and outfits like Halliburton.

Presumably, in any case, a lot more Nigerians are going to be promised free apartments and cars if only they can make it to Germany...

analyst123's picture

hmm, can someone enlighten me on why we care about Nigeria?

Ghost of Porky's picture

Because their prince is trying to escape the country and is willing to give away half his fortune rather than surrender it all to the government.

ATM's picture

Because the meltdown there will mean 160 million "refugees" to the US and Europe.

And imagine, they are mostly Muslims.....

assistedliving's picture

how much did GOLDMAN SUCK's make frontrunning that 'advice'?

bluskyes's picture

bullish small arms manufacturers

Spungo's picture

Thank god they're not stuck in deflation like we are. /s