Naira Heading For Devaluation, Analysts’ Consensus

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NairaA slew of investment banking analysts has consistently maintained a position that the Nigerian naira is relatively overvalued, saying the monetary authority is merely postponing the inevitable. Naira closed the week at N445.33 versus the United States dollar at the Investors’ and Exporters’ foreign exchange window.

In the foreign exchange markets, the naira has held steady against the United States dollar after spurious demand that hit the system hard and fast following the decision to redesign the local currency.

Naira has dropped to N446 against the United States dollar at the Investors’ and Exporters’ foreign exchange window in 2022, from an average exchange rate of N415 earlier in the year.

Forces of demand which appear to be stronger than supply in the local FX markets have resulted in the self-devaluation of the local currency. The depreciation has affected the local economy as some listed companies’ exposures worsened.

FX losses continue to reduce companies’ profitability, thus reducing tax payments to the government. Godwin Emefiele, a pro-growth Central Bank governor has remained unfazed over the persistent devaluation of the local currency.

The CBN has maintained its stance not to devalue the naira, though occasionally, it allowed markets to do the needful. In the parallel market, exchange rates have worsened with speculative demand clouding the real value of the local currency.

Instead, Emefiele-led CBN initiated a flood of plans to increase dollar inflows into the economy – CBN introduce the RT200 Non-Oil Export Rebate Scheme aimed at growing earnings from non-oil exports to US$200 billion over the next 3 to 5 years.

Recall that the apex bank has earlier launched the #naira4dollar scheme as part of an effort to attract remittance. Analysts said the adoption of tighter monetary policy is also expected to attract more foreign investors, especially into the bonds market as yields have been rising steadily since the series of rate hikes.

However, Meristem said there is only so much that these policies can achieve in shoring up the external reserve balance and maintaining the exchange rate as the country’s major FX sources have been embattled.

In its commentary note, Cordros Capital analysts have maintained a position on the need to devalue the naira. The firm said FX liquidity issues will remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in supply relative to the pre-pandemic levels.

“… considering the tepid accretion to the reserves given low crude oil production and elevated PMS under-recovery costs, foreign portfolio investment (FPIs) which have historically supported supply levels in the Investors and Exporters window will be needed to sustain FX liquidity levels in the medium to long-term.

“Hence, we think further adjustments in the NGN/USD peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market”, Cordros analysts maintained.

Also, a financial expert, Kingsley Aigbe CFA, told MarketForces Africa that the apex bank is merely postponing the inevitable. Others believe that a devaluation will worsen Nigerian macroeconomic indicators.

Monetary authorities implemented capital control measures to curb bags of dollars from leaving the local economy. Large numbers of items have been banned from accessing foreign currency for imports.

Also, FX backlogs owed to foreign investors trying to move foreign currencies out from the local economy have been on the rise.

In its commentary note, however, Meristem Limited said the difficulties associated with foreign repatriation of funds have been evident in recent months as some international airline operators have at different points this year announced plans to suspend flights to and from Nigeria due to inability to repatriate earnings.

Confirming this, the International Monetary Fund (IMF) estimates the trapped foreign funds in Nigeria at about USD1.70 billion as of November 2022. The FX repatriation woes have mostly been driven by the inadequacy of FX inflows into the country.

Unlike some of its other African counterparts (Angola and Libya), the gains from higher crude oil prices have been mostly lost on Nigeria’s external reserve owing to the high petrol subsidy bill and lower oil production volumes, Meristem noted.

According to the investment firm, this has significantly reduced the CBN’s ability to defend the Naira, leading the official exchange rate lower in the Investors’ and Exporters’ FX window.

While the official market has remained relatively stable so far in the year, the significant volatility in the parallel exchange rate has kept the greenback rate at a significant premium, 72.92%, over the official rates.

“…we expect foreign investors to continue considering challenges with FX repatriation when making investment decisions into Nigeria.

“Furthermore, in a bid to allow the exchange rate to reflect current realities, we do not rule out the possibility of another Naira devaluation next year”, Meristem said in a note.

Analysts at the firm believe that FX supply is likely to be constricted over the coming year given the aforementioned factors and the expected election-related increase in demand for the US dollar.

Recently, Bank of America saw the devaluation of the local currency, noting that the naira is 20% above its fair value measurement using the CBN real effective exchange rate (REER).

Three indicators – the widely-used black-market rate, the central bank’s real effective exchange rate, and “our own currency fair value analysis” shows the naira is 20% overvalued, economist Tatonga Rusike said in a note to clients.

“We see scope for it to weaken by an equivalent amount over the next six-nine months, taking it to as high as 520 per USD,” Rusike said.

While the naira will come under increasing pressure “due to limited government external borrowing,” devaluation is unlikely to happen until after the February 2023 presidential elections, the bank said.

MarketForces Africa analysts said while desirable for the proper functioning of the market system, a devaluation will have a downside for Nigerians who are already battling with a high cost of living.

Analysts said Nigeria has close to zero comparative advantage in the production of any goods including its hydrocarbon products. It is unlikely that a devaluation will bring succor to the people except for possible job losses and hot monies.

 


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