On 24 June, Nigeria’s central bank curbed the access to foreign currency by restricting foreign exchange purchases for imports of 41 items (list). In addition, access to the interbank currency market for investors wanting to buy foreign currency bonds has been curtailed.

Impact on country risk

The naira has been under pressure ever since oil prices plunged and political uncertainty around the elections provoked large capital outflows. In February 2015 the naira was fixed after being de facto devaluated twice. Nevertheless, pressure on the naira continued and prompted the central bank to sell around USD 3.4 billion to prop up the naira, further eroding foreign exchange reserves to around USD 29 billion. These foreign exchange controls show Nigeria’s reluctance to allow for more currency flexibility, while at the same time dollar reserves are sought to be preserved at adequate levels. Nevertheless, since foreign exchange restrictions were introduced last week, the naira weakened even more and lost another 2.7% on the black market. The growing gap between the official and parallel exchange market, reflects an ongoing currency pressure and raises the risk for more damaging capital controls to come. What is more, in the absence of revived investors’ confidence and capital inflows, new external debt liabilities are expected to be concluded at less favourable terms. Due to Nigeria’s deteriorating liquidity position and restrictions on dollar availability, Credendo Group has just decided to downgrade Nigeria’s short-term risk classification to category 5/7 (coming from 4/7).

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com