Naira Tumbles as Analysts Project FX Devaluation
The Nigerian Naira tumbled after a slew of investment banking analysts predicted that the foreign exchange (FX) rate at investors’ and exporters’ foreign exchange window is more likely to hit N500, citing macroeconomic plays, Central Bank policy and lack of dollar inflows.
At the investors and exporters FX window, the naira depreciated to N461.90 to the United States dollar, representing a decrease of 0.09 per cent, compared with the 461.50 it was sold on Tuesday.
The open indicative rate closed at N460.25 to the dollar on Wednesday. An exchange rate of N462 to the dollar was the highest rate recorded within the day’s trading before it settled at N461.90.
Market data shows that local currency sold for as low as N440 to the dollar within the day’s trading. A total of N151.26 million was traded at the official Investors and Exporters window on Wednesday.
Naira lost 0.27% to N744 from N742 following demand pressures witnessed in the parallel market amidst uncertainties around new naira notes issuance and withdrawal limits that have been subjected to national debates.
In its bull case scenario, Meristem securities limited has projected that naira will be sold for #501.15 in the year provided the price of crude oil remains upbeat and Nigeria’s oil production recovers.
The investment firm worst case scenario estimated the naira exchange rate at N520.05 should there be another global shock in the crude oil market, dragging oil prices downward in addition to Nigeria’s low output.
Johnson Chukwu, Cowry Asset CEO said at a webinar on Tuesday express that the naira will continue to face demand pressure. In his presentation, Chukwu noted that uncertainties surrounding the exchange rate will prevail in the face of less impressive net inflows into foreign reserves.
For its best case condition, Meristem’s prediction was anchored on moderation in capital flow reversal and fuel subsidy removal. Analysts however believe that if capital flow reversal persists, the exchange rate will be worse off.
“…we do not rule out the possibility of another Naira devaluation in 2023 to allow the exchange rate to reflect current realities”, Meristem stated. It supported the projection with the fact that Non-deliverable Forwards at the Naira settled OTC FX futures market as of December 30th, 2022, revealing that contracts maturing in one year closed at N529.55.
The investment firm analysts said this reflects investors’ pessimism about the direction of the Naira’s value against the greenback.
On the other hand, the potential removal of the petroleum subsidy bill would improve accretion into the FX reserves and strengthen the CBN’s ability to defend the domestic currency, according to Meristem.
“For our outlook, we believe the FX liquidity issues will remain over the short-to-medium term as we do not see any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels”, Cordros Capital said in a note.
“.. we think further adjustments in the exchange rate peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market”, Cordros Capital maintains stance.
CardinalStone Partners in its outlook for the year said FX pressures will persist in 2023. The multi-assets investment banking firm said in 2022, average monthly net flows through the CBN settled at a negative $81.0 million versus +$321.9 million in 2021.
It considers this as a significant dip in crude oil production constrained the accretive movement of higher crude oil prices. Adding an extra layer of pressure on the market, foreign inflows were tepid in the review period on global risk-off sentiments, FX repatriation concerns and the absence of market reflective exchange rate, CardinalStone added.
Analysts said the limited FX inflows also curtailed the magnitude of FX supply, as average CBN monthly sales across the FX strata currently stand at $1.4 billion, lower than the 3-year average of about $2.0 billion.
Hence, the widened disequilibrium in demand and supply drove the parallel market premium to an all-time high in 2022. “We project naira to weaken to $500 in 2023”, CardinalStone said in its outlook for the year. #Naira Tumbles as Analysts Project FX Devaluation
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