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Godwin Emefiele - CBN Chief

‘Concerns around FX adjustment to Dampen Foreign Inflow’

  • Estimates Naira Exchange rate range of ₦410 – ₦430 per dollar
  • Lowered real GDP growth forecast for 2020 from 2.3% to -2.69% in 2020.
  • Expect the headline inflation rate to settle at 13.3%
  • Supply side heavy crisis: Fiscal/Monetary responses not enough to foil recession

United Capital Plc has said that concerns around further foreign exchange adjustment are likely to discourage large-sized foreign investment, both portfolio and direct inflows for the rest of 2020.

The leading investment firm said it believes the odd in favour of a further naira adjustment which may take official rate to ₦410 – ₦430 per dollar range by year end.

“However, we believe the CBN will continue to defend the value of the local unit for as long as it can”, analysts said.

At Importer and Exporters Window on Friday, the Central Bank asked that bids for foreign exchange be made at 380 naira per dollar, compared with 360 previously.

United Capital in its macroeconomic note stated that what could have been a flourishing year for the Nigerian economy was caught in the web of a global public health crisis which grounded domestic and external economic activities.

'Concerns around FX adjustment to Dampen Foreign Inflow'
Godwin Emefiele – the CBN Governor

The firm stated that already, domestic economic growth in Q1-2020 slowed to 1.87% and the figure for Q2 2020 is set to come in negative, despite the series of stimulus packages announced by the authorities aimed at easing the impact of the pandemic on businesses and households.

Notably, analysts said given that the current crisis is supply-side heavy – restriction of movement and business shutdown, it is clear that the demand-side responses by both the fiscal and monetary authorities using liquidity injections would not be enough to prevent an economic contraction in the short term.

However, the palliatives and reforms that are being announced may reduce the probability of sliding into a deep recession or quicken recovery once the incidence rate of the pandemic begins to drop and the economy is fully re-opened, United Capital said.

The firm said the Nigerian economy may enter a technical recession by third quarter of 2020 (after two consecutive quarters of contraction in second and third quarters of 2020), with a chance of early recovery by fourth 2020 or first quarter of 2021.

Accordingly, United Capital said it has lowered its real GDP growth forecast for 2020 from 2.3% to -2.69% in 2020.

FX Scarcity, Supply Chain Disruption Support Rising Inflation

“The biggest downside risk to the above projections remains the possibility of a second round of lockdown, especially if the virus continues to spread rapidly”, the firm remarked.

Thus, United Capital said this might delay the possibility of an early recovery or a V-shaped recovery to a more strenuous U-shaped or W-shaped recovery.

“By implication, corporate earnings will be pressured except for sectors such as healthcare, technology, and household utilities”, analysts said.

Also, United Capital said its outlook for the headline inflation rate remains biased upward in the second half of 2020.

“We expect the headline inflation rate to settle at 13.3% year on year in 2020 as against Pre-COVID-19 expectation of 11.9%.

On the exchange rate, United Capital said the odds are in favour of a further naira adjustment which may take the official rate to ₦410/$ – ₦430/$ by year-end.

‘Concerns around FX adjustment to Dampen Foreign Inflow’