Why is it risky to convert your naira to dollars or USD (T) – Nairametrics


Inflation data is out. 17%. The common interpretation is that the purchase value of your money has decreased by 17%. A quick comparison of inflation data with other countries – Saudi Arabia is at 0.4%, the UK is at 3.2%, and in the US it’s at a ‘transient’ 5.3%.

The consequence is that Nigerians find different means or investment vehicles to protect their hard-earned naira from devaluation. They want their 100,000 naira to be 100,000 naira on a monthly basis.

The common tendency now to achieve this is to “buy the dollar and preserve their income in naira”. While in theory it sounds like a well-thought-out plan or hedge as we call it in finance, it does have some flaws.

Read: Fear mounts over possible conversion of dollars from home accounts to naira

Engaging in this form of hedging – inadvertently makes a currency trader vulnerable to volatility. Currency exchange rates can change rapidly in response to real-time economic and political events. The tendency to always buy at any price may lead you to buy at high prices and when it hits a negative inflection point, the goal of “preserving value” is defeated.

The fundamentals seem to change soon. There are signs that the Nigerian economy will soon be supplied with dollars.

Read: Nigerian banks do not have enough dollars to finance the acquisition of Shell assets in Nigeria – Agbaje

  • Nigeria has announced plans to make another visit to the global market through the issuance of a $ 6.2 billion Eurobond in October. JP Morgan, Goldman Sachs, Citigroup and Standard Chartered have already been selected as international bookkeepers for the Eurobond issue alongside local firm Chapel Hill Denham.
  • The recently oversubscribed $ 500 million unsecured euro bond by Access Bank Plc, which has attracted interest from leading investors around the world, should bring optimism that investors will be rushing into euro- federal government bonds.
  • The recent $ 3.35 billion that Nigeria received from its share of the IMF’s SDRs (Special Drawing Rights) boosted the country’s dollar liquidity.
  • President Buhari’s recent request for a $ 4 billion loan, which has been hotly contested, is likely to be stolen as it could gain approval from the Senate, where his party has a majority. Nairametrics reported yesterday that Senate Speaker Ahmed Lawan has given the Senate Committee on Foreign and Local Debt a week to consider the president’s loan request and return to the Senate next Tuesday.
  • Additionally, there have been indications that Indian refiners, Nigeria’s biggest oil buyers, are increasingly raising execution rates amid renewed confidence that there will be a pick-up in demand. of petroleum products. Market information is that some refiners plan to bring series to 100% capacity for the remainder of the year. With oil at $ 74-75, it’s a good time for Nigeria and Nigerians.

With the possibility of liquidity support and the Central Bank crackdown on the speculative “abokiFX” website – the artificial prices will soon materialize and the intrinsic value of the Naira against the dollar will emerge. Herein lies the need for introspection in the practice of “currency conversion”.

Read: Unilever Nigeria Forced To Buy Dollars Over 9% Above Market Rate

Let’s break this down.

In investing, there are three principles to use as guidelines.

  • Investment objective
  • Appetite for risk
  • Investment horizon

In this particular case, the investment objective of many Nigerians is to preserve their income in foreign currency. They just want value – not necessarily profit. Any “profit” is just a bonus for their business. Each year, Morgan Stanley selects the best safe haven currencies of the year. The US dollar was chosen in 2020 as the best safe haven currency. The Japanese yen and the Swiss franc are relatively mentioned as safe values.

Risk appetite considers the risk tolerance of the investor. Can Nigerians afford to deal with the volatility of currency movements? Would they be disturbed when they realized they bought at the top like the naira appreciates?

A quick glance at the Central Bank’s monthly exchange rate data over the past several years will corroborate the dangers of buying USD every time, especially at the height of the speculation frenzy.

Read: Exchange Rate: Is Nigeria Better With A Low Naira?

PS: BDC (USD) – Bureau de change.
IFEM is the interbank foreign exchange market.

According to the above data, in 2016 the US dollar went from N 396.15 to N 431.10 on the black market from the 8th to the 9th month. It then reached its peak in the 2nd month in February 2017 after sustained levels in the N400 + zone. Suddenly, it will be observed that a drop of 64 Naira occurred the following month (March 2017) before prices returned to N300 + levels in the following months.

If you had invested in Panic during this time, you would have bought at the top and found that you were paying too much for a currency that you did not need at the time. Noise trading creates a tendency to buy when prices are high and sell when prices are low. So if you bought dollars in February 2017, you won’t break even until the second half of 2021.

This leads to the third principle, the investment horizon.

The investment horizon refers to a short or long time horizon. In the short term, when there is a need for personal liquidity, engaging in dollar hoarding or speculative trading is riskier than in the long term. Using the data presented above, a person in need of cash would have sold their dollars at a lower price. The value of his earnings would have suffered the double whammy of the dollar loss and the inflation that we were fleeing. Longer term, time would smooth volatility.

In the cryptocurrency space, Nigerians trade Naira for USD (T), USD (C), and BUSD in peer-to-peer transactions. The above coins are referred to as stable coins “pegged” to the dollar. According to data found on Paxful and Local Bitcoins, over a 90-day period, Nigerians traded $ 115,077,936, the highest trading volume recorded in Africa. This excludes data from Binance, a more popular cryptocurrency exchange. Peer to Peer (P2P) transactions appear to be the sophisticated way Nigerians engage in currency swaps.

Image: Example of a P2P transaction as of September 16, 2021.

It involves a willing buyer looking for a willing seller on a P2P platform. The USD (T) seller sets a price at arbitrary rates which may vary and deviate from market rates. There are cases of people charging N800 for the dollar on these platforms.

Additionally, there are stories of people being duped on peer-to-peer platforms. Naira sellers are vulnerable to fraudulent peers who might not fulfill their end of the bargain. Buying “stablecoins” in an unstable market carries valuation risk and the risk of being defrauded is a significant threat to personal income.

So what’s the exit?

Definitely not save money. As billionaire investor Ray Dalio puts it, “Cash is Trash”. Cash offers no real return or return and is negatively affected by inflation. The investment objective of Nigerians is valid, however, the real hack is earning in foreign currency. Different ways to do this are by offering services on Upwork, Fiver, etc., partnering with relatives and friends in the diaspora on how to channel their investments back home and lump sum investing in dollar denominated assets with commercial and investment banks.

Another option is to invest in assets and stocks that offer returns above the rate of inflation. Last year, the Nigerian All-Share Index of Africa’s largest economy posted its best performance, rising 45.7% in 2020, the highest among 93 stock indexes tracked by Bloomberg. This has made it the best performing stock market in the world. Some experts have advised the CBN to make Treasuries attractive to investors with low risk appetites.

The dollar has taken a hit since last year. Looking at the dollar index, it is far from its highs. Nigerians are therefore paying a premium for cheap dollars.

In conclusion, it is advisable that if one does not need dollars, engaging in a prudent and speculative demand for dollars can be counterproductive if the opportunity cost is a loss of income due to the loss of income. volatility. The truth is, no UK citizen watches exchange rates on a daily basis, although you could argue that the UK economy is more stable. The obsession with the exchange rate is partly responsible for why people refer to Nigeria as a “dollarized economy”. The aggregate speculative demand for dollars puts pressure on the forex market and inadvertently affects the exchange rate.


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