Naira Remains Overvalued but Large Devaluation Unlikely – CSL
Nigeria’s local currency, Naira, remains overvalued but a large devaluation is unlikely, says CSL Stockbrokers Limited in a pre-Monetary Policy Committee (MPC) report obtained by MarketForces Africa on Monday.
CSL Stockbrokers said in the report that since the last monetary policy meeting, the average parallel market premium is still elevated at 23%, noting that this implies continued FX pressures despite the increased intervention by the Central Bank of Nigeria (CBN).
MarketForces Africa recalls that Naira struggles to retain value in the foreign exchange market. Though, the local currency held ground against a further slide in the parallel market where it reported a marginal gain.
Analysts at CSL Stockbrokers expressed the view that the CBN’s drive towards currency unification, alongside higher oil prices, is yet to translate to tangible currency gains, with complaints of FX shortages persisting.
According to analysts, several manufacturers and investors have continued to look to the parallel market to meet their foreign exchange needs.
“Naira remains overvalued, but the recent tightened spread in Naira valuation and continued rebound in crude oil price is likely to shield a large devaluation”.
In the note, the firm said the FX outlook appears less pessimistic in the second half of 2021, on the back of the expected improvement in the current account deficit position which printed at 1.2% of the gross domestic product (GDP) and Plans for Eurobond issuance.
Nigeria recorded tepid GDP growth of 0.51% in the first quarter of the year after economic size tumbled about 2% in the fiscal year 2020.
Due to weak foreign currency earnings which strongly driven the dollar shortage after the pandemic shock, Nigeria’s external reserves had dropped to $33.25 billion as of 23rd July 2021.
Unfortunately, remittance inflow has been weak in addition to lower foreign investors’ participation in Nigeria’s financial market after the CBN initiated capital control measures to protect foreign reserves.
Efforts have been geared towards Eurobond raised due to loan disbursement conditions given by the multilateral lender, IMF, as related to the CBN multi-tiered exchange rates.
However, the dollar shortage forces the CBN to succumb to rates Unification as it adopted the National Autonomous Foreign Exchange (NAFEX) as the official rate even for government transactions.
Looking at the future of the local currency, CSL Stockbrokers said the proposed increased Special Drawing Right (SDR) allocation by the IMF for its member countries could provide support for Nigeria’s external reserve accretion this year.
The expectation is that Nigeria’s SDR allocation increase could be closer to US$3 billion, which could prompt the government to approach the IMF for further revolving credit facility (RCF) financing when the allocations are completed in Q3-2021.
MPC to retain policy parameters
The investment firm projected that the monetary policy authority will retail policy parameters at the end of its July 2021 meeting on Tuesday. Analysts said they expect the MPC to keep the policy rate unchanged at 11.5%.
“Despite the growth trajectory witnessed in the first quarter of the year (Q1 2021), the economy remains fragile and significantly weaker compared with the pre-pandemic level.
“As such, a rate hike might worsen the fundamentals. Although inflation retreated for the third consecutive month in June, risks are firmly tilted to the upside, a concern for the committee which should stop any consideration of a reduction in rate”, CSL Stockbrokers stated.
Growth expectations in 2021
Explaining its views, CSL cited that many analysts expect that growth will increase significantly in 2021, owing to a low base in the prior year.
“While we acknowledge the base effect, our analysis suggests a muted/modest impact on most of the heavy-weighted sectors”.
To start with, output in the Agric sector that accounts for about 26 of the economy in 2020 was largely un-impacted by the Covid-19 pandemic, with 2.2% growth aligning with a 3-year average of 2.3%, analysts explained.
They noted that beyond this, the 13.2% growth in the ICT sector which accounts for 15% of the economy in 2020 was 2 times higher than the 5-year historical average, supported by work from home policy.
“As such, we expect a high base to result in slower output growth in 2021”, CSL Stockbrokers stated in the commentary.
Analysts at the firm said they also expect output to remain depressed in both the real estate and domestic trade sectors that account for 22% of the economy, as the key driver of the sectors (domestic consumption) will probably not recover till 2022/2023.
“For the oil sector, we expect OPEC + agreement to continue to cap crude oil production. Overall, we forecast growth of 2.4% in 2021.
Read Also: Current Account Deficit: Currency Adjustment inevitable in 2021
“Though we expect the continued recovery of the economy to provide some respite for the committee, output growth remains fragile and a call for a rate hike may be considered too early”, the firm added.
Naira Remains Overvalued but Large Devaluation Unlikely – CSL
