Naira Challenges Raise Possibility of Materials Devaluation – Report
The Nigerian naira remains under pressure, raising the possibility of a material devaluation following the presidential election in February 2023, Fitch Ratings said in a brief obtained by MarketForces Africa.
The inability to reliably source United States (US) dollars on the official FX market has itself contributed to lower foreign portfolio investor (FPI) inflows, which will continue to put further pressure on US dollar availability, the global ratings firm added.
Fitch expects US dollar scarcity to continue weighing on economic activity in 2023, compounding the effect of high inflation and rising interest rates on borrowers’ repayment capacity, while negatively affecting banks’ trade finance business and FC liquidity.
According to market participants, the CBN has accumulated a backlog of foreign currency demand from importers, estimated at about USD3 billion.
In addition, the International Monetary Fund, IMF, hinted that there is an additional USD1.7 billion outstanding to foreign portfolio investors (FPIs), bringing the total backlog to almost USD5 billion.
Nigeria’s already-high structural inflation has been aggravated by global commodity price spikes, supply constraints and a weak naira, according to a Fitch Ratings note.
Nigeria’s headline inflation rate printed at 21.34% in December 2022 after a 13 basis points slowdown from the previous month, causing inflation to reach a 17-year high.
Analysts noted that Nigeria’s falling external reserves levels have contributed to US dollar shortages in the official FX market, as evidenced by the rapid depreciation of the Nigeria naira in the parallel market to NGN738/USD on 31 December.
Since then, the exchange rate at the open market has worsened to N750 per United States dollar in the open market where it is freely traded to users. >>>Naira Depreciates to N462 at Investors, Exporters FX Window
According to Fitch, the parallel market rate is therefore trading at a large discount to the official exchange rate, raising the possibility of a devaluation following the change in administration that will follow the presidential election in February 2023.
Monetary policymakers, particularly in emerging markets, are challenged with marked pressure on their respective local currencies due to rising global interest rates and risk-off sentiments. Global investors rank the FX convergence of the naira in 2023 as a major policy shift that could incentivise investment flows. #Naira Challenges Raise Possibility of Materials Devaluation – Report