Nigeria’s FX Rates to See Increasing Convergence in Months -Analysts
Anchored on an improved outlook for foreign currency, expect increasing foreign exchange rates convergence in months; says CardinalStone in its macroeconomic update, noting that spread on Naira will narrow down significantly.
Last week, Naira was steadied against the United States dollar at N411.50 at the investors and exporters window while the local currency appreciated 1.4% in the parallel market N510.
Meanwhile, banks sold the greenback to retail customers at N412 a dollar last week as monetary policy authority maintains support for the local currency.
According to CardinalStone, the spread between FX rates in the parallel market and the Investors & Exporters window is likely to materially narrow in the coming months.
The high spread between official and parallel market rates had increased foreign currencies speculation in the market. Currencies traders were milking much more than expected due to a dollar shortage in the economy.
After the Central Bank (CBN) announced the decision to end the weekly dollar supply to Bureau de Change operators, the exchange rate depreciated strongly but pressure reduce as banks started selling dollar at N412, closing gap National Autonomous Foreign Exchange (NAFEX) rate.
At the weekend, Naira recorded gain against the dollar at investors and exporters window as well as in the parallel market as speculator count losses. The local currency is expected to gain further as external reserves improve.
Recall Nigeria’s Debt Management Office announced the appointment of transaction advisers for the issuance of Eurobonds as part of the new external borrowing of $6.2 billion provided in the 2021 Appropriation Act.
This disclosure follows the International Monetary Fund (IMF) approval of $650 billion in Special Drawing Rights (SDR).
CardinalStone said from the sum, Nigeria is expected to be allocated about $3.4 billion based on its quota contribution and economic standing.
“The SDRs are not actual currencies but assets through which IMF members can improve their balance of payment positions by exchanging all or some of their allocations for freely usable currencies of other member countries.
“They can also be used as a basis for seeking concessionary debt facilities from the IMF. However, given lessons from the previous year, we favour refraining from utilising our SDR allocation until a rainy day2, the firm explained.
It added that given elevated oil prices and the increasing likelihood of a successful Eurobond issuance, analysts said they do not think that Nigeria is in a dire situation to warrant a full SDR drawdown.
In assessing the materiality of the recent developments, Cardinalstone analysts noted that the combined planned foreign borrowing of $6.2 billion and SDR allocation of $3.4 billion amount to about 68.1% of the 2021 current account deficit forecast and 28.7% of Nigeria’s foreign exchange reserves of about $33.5 billion.
Due to this, the firm said there is a strong likelihood that the FX liquidity position of Nigeria will improve before the end of the year if these inflows materialise.
Explaining the impact that improved dollar inflow would mean for the economy, analysts said the spread between the parallel market and the Investors and Exporters FX rate Window is likely to materially narrow in the coming months.
The investment firm said this narrowing spread should primarily reflect sharper corrections in the parallel market rate, which is currently substantially higher than the fundamentally derived Naira to dollar rate.
“We also expect some retail demand to flow away from the BDCs to deposit money banks, which have been recently mandated to meet legitimate dollar needs”
In addition, Cardinalstone noted that the need for an aggressive mop-up of banking system liquidity will likely taper on projected improvement in the near-term FX liquidity position
As a consequence, analysts said they expect yields to remain near current levels until the fourth quarter of 2021 when the fiscal authority may have to increase issuances ahead of the N593.9 billion bond maturity in January 2022.
“The apex bank may also be cautious ahead of the pre-election year 2022. These, and the opportunities to earn better returns on bank placements, continue to support a short-duration strategy. The expected improvement in FX liquidity could provide some support to equities”.
“To this point, improvements in FX conditions could positively impact sectors such as manufacturing, as FX-induced inflationary worries subside and pressures on real consumer income taper.
“More so, companies that rely heavily on imported raw materials or require FX for routine plant maintenances may get some reprieve”, CardinalStone explained.
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Nigeria’s FX Rates to See Increasing Convergence in Months -Analysts
