Firm Forecasts Gentle Naira Depreciation in 2025
The naira has continued to court Broadstreet analysts’ attention as the local currency has enjoyed stability due to significant improvement in the foreign exchange market. The Central Bank of Nigeria’s (CBN) reforms policies implemented to eliminated lacuna which have been acting as disincentives to sufficient foreign inflows have boosted market confidence.
Still, some analysts foresee a mixed outlook despite the authority’s move to keep the supply side strong by selling US dollar to banks, and allowing informal currency traders access to foreign currency at official rate.
The CBN reforms have brought down speculative traders activities to their knees with near exchange rates convergence in the forex markets. With the change in FX dynamics, analysts at Research arm of Coronation Merchant Bank Limited have predicted gentle naira deprecation for 2025.
Though less probable, analysts said their optimistic expectation for the naira is to see exchange rate appreciating by 27.5% to N1,230 per US dollar in the year. With much higher probability, Coronation Research anticipates that the naira could fall by as much as 11.7% to N1,750 per dollar.
“Our base case scenario – with 65% probability- for the Naira/US dollar exchange rate in 2025 is for gentle Naira depreciation. This scenario is consistent with a continuation of tight monetary policy during 2025, though with some easing during the second half of the year as inflation is tamed.
“We see the US dollar value of the Naira falling by 11.7% over the course of the year to US$1/N1,750”, analysts team led by Guy Czartoryski said. Analysts anchored their prediction on expectation that the yield of 1-year T-bills and of OMO bills would exceed the potential for Naira/US$ devaluation.
Coronation Research optimistic scenario, albeit with lower probability, foresaw the US dollar value of the Naira appreciating by 25.7%, influenced by strong flows of both FPI and the CBN’s US dollars into the NAFEM market, to US$1/N1,230 by year-end.
On the extreme, the firm predicts a 29.7% fall in the US dollar value of the Naira to US$1/N2,200, consistent with an abandonment of tight monetary policy.
According to the report, whether the naira is overvalued or undervalued is less important as market focus more on demand and supply. Analysts think pessimism regarding the Naira to US dollar exchange rate can be overdone. “… Most years see the Naira depreciate against the US dollar – this is true over the past half century”.
The firm said there are years when exchange rate either stabilises or even appreciates, saying the behaviour of the parallel market rate in 2017 is an example of appreciation. “We learned that what matters is not fair value but supply and demand”, Coronation Research said in its outlook for the year.
The introduction of the Electronic Foreign Exchange Matching System (EFEMS) in November 2024 improved visibility in the NAFEM market and is likely stimulating flows. The CBN’s data show that its own supply of US dollars to the NAFEM market has been quite moderate in 2024, averaging some US$280 million per month up to the end of November.
By contrast the contribution of the CBN to the then NAFEX market reached as high as US$1.0 billion per month during 2019. The contribution from exporters has been quite consistent during 2024 at a monthly average of US$645 million, while the contributions from foreign portfolio investment (FPI) has been volatile from month to month.
Foreign portfolio investors’ contribution of US dollars to the NAFEM market was strong in March but declined thereafter. However, in October and November, and likely influenced by the upbeat report in the World Bank’s Nigerian Development Update (NDU), FPI picked up again, reaching over US$1.0bn in each month.
Further evidence of foreign investors’ interest in Nigerian debt instruments is suggested by the high level of participation in the CBN’s auction of Open Market Operation (OMO) bills in December.
These are typically purchased by foreign investors as well as by domestic banks, Coronation Research said in the report. Analysts think it possible that January and February 2025 will see a high level of purchases of Nigerian T-bills and OMO bills by foreign investors.
As foreign investors sell US dollars to purchase Naira-denominated T-bills and OMO bills, analysts would expect the US dollar position of the Central Bank of Nigeria to improve. #Firm Forecasts Gentle Naira Depreciation in 2025 NEPC Reports 20.7% Growth in Nigeria’s 2024 Trade Volume
