Analyst Express Optimism in Exchange Rate Stability, Sees I&E/NAFEX Rate Pegged at N434/USD

Nume Ekeghe

Analysts at Coronation Merchant Bank Limited have predicted a stable exchange between now and the end of the year as crude oil prices steadily accelerates.

They noted that with Nigeria’s foreign exchange reserve hovering around $40 billion, a steadily acceleration of oil prices, and external borrowings would place the central Bank of Nigeria (CBN) in a better position to defend the naira from weakening this year.

In a report titled, “Blend of Optimism and Uncertainty, they added that they also expect to see the I&E/NAFEX rate pegged at N434/USD, by the end of the year, which is a slight depreciation from its current rate at N416.67/USD.

According to the analysts: “We have a cautiously optimistic view of the exchange rate. There are concerns around inflows accretion into the external reserves. At the France-Nigeria Security and Economic Summit held in November ‘21 in Paris, the CBN governor stated that foreign reserves would surpass the $42 billion threshold by mid-2022. This view was primarily hinged upon elevated crude oil price, the impact of Eurobond issuance, and a stable exchange rate.”

The analysts pointed out that a hindrance to this upward trajectory would be if oil output declines.

They added: “Although oil prices have remained relatively healthy over the past 12-months, it is susceptible to economic shocks. Nigeria’s oil production capacity continues to limit the country’s ability to reap the benefits of elevated oil prices. According to OPEC data obtained from secondary sources, Nigeria’s oil output excluding condensates increased by only 8.3 per cent m/m to c.1.3mbpd in November ’21, which is below budget estimates 1.8mbpd and OPEC quota of 1.6mbpd.”

“Another factor to consider when examining reserves is foreign portfolio investment inflows. Nigeria’s macroeconomic environment remains fragile and is attractive to investors with a huge risk appetite. Given the general view that tapering across advanced economies will kick off in 2022, this suggests that monetary policy normalisation is on the horizon.

“One potential implication of this is a shift in international capital flows away from emerging and frontier markets such as Nigeria, as well as a spike in borrowing costs on the global capital market. In addition, negative real interest rates as the headline inflation rate remains in double digits would also contribute to weak portfolio investment inflows.”

They further added that they expect inflows into the foreign reserves on the back of external borrowings there seems to be keen interest in bilateral and multilateral loans in 2022, as seen in the latest debt management framework 2021-2025.

“Regarding Eurobond issuances, there is no clear direction on issuance dates for 2022. Barring any large outflows, we see reserves at +/- $38 billion by year-end 2022. This can provide cover of c.9.0 months’ merchandise imports based on the balance of payments for the 12 months to December ‘21, and c.7.0 months when we add services. We consider this a healthy buffer and sufficient to defend the naira at current levels, we have provided room for potential small depreciations. We see the I&E/NAFEX rate at N434/USD at end-2022,” the report stated.