FX: Weaker fundamentals may force currency repricing in 2020 – Cardinalstone
On the back of latest developments in the global economy, analysts at Cardinalstone Partners Limited have said that the weaker fundamentals may force currency repricing in 2020.
The firm hinges its position on the development in the global economy, including declining crude oil prices and sloppy external reserves. Despite the weak economic position, the Central Bank of Nigeria has again maintained decision not to devalue the local currency-naira.
Though at the weekend, Naira was traded at above ₦400 to a dollar in the parallel market. The fundamental case for the naira is now materially weaker, with twin deficits across current account and fiscal balances, analysts remarked. These combine with higher inflation expectations bolster the argument for a currency repricing.
“External buffers are lower, with reserves and excess crude accounts now at $36.2 billion and $71.0 million apiece compared to $62 billion and $20 billion before the 2008 global economic crisis.
“This comes with significantly higher vulnerability to external shocks as foreign portfolio flows into the apex bank’s Open Market Operations now constitutes about 32.7% of reserves.
“This comes amidst one of the worst oil market crises since the Gulf war of 1990/1991”, the investment firm held.
“Aided by marked deterioration in oil economics, we expect the CBN’s unorthodox currency management to capitulate before the end of 2020 if oil prices continue to go south”, the firm stated. By the firm base case projection, the naira is likely to be repriced closer to its fair value of about N437.20.
It said this reflects an average inflation of about 13% for Nigeria and 2% for United States of America, in 2020. Cardinalstone noted that a delayed response by the CBN, which is likely, could stoke further panic buying and hoarding in the black markets.
“The CBN may eventually adopt a step-wise approach to naira repricing in 2020 in view of the politically hot nature of devaluation discourse. As well as potential knock-on effect on the populace, who are also bracing up for electricity tariff adjustments”, analysts held.
FX: Weaker fundamentals may force currency repricing in 2020 – Cardinalstone
