Coronation Merchant Bank Foresees Stable Naira in 2020


Obinna Chima

The Head of Research, Coronation Asset Management, Mr. Guy Czartoryski, has predicted a stable naira exchange rate against the dollar this year.

Czartoryski, said this in a presentation titled: “Year Ahead 2020: Re-risking the Financial System,” he delivered at a breakfast session organised by Coronation Merchant Bank in Lagos, yesterday.

According to him, in the long-term, the naira depreciates against the dollar in line with the difference in inflation between the two currencies.

He noted that over the years, trying to stop the naira from depreciating had proven to be a forlorn activity.

“We believe the CBN will keep the exchange rate at close to N362.50 to a dollar for most, if not all, of 2020. But the effect will be to add pressure on the naira as its fair value slips against the dollar.

“The recent history of the naira versus dollar exchange rate shows that 20 per cent over-valuation of the naira, in terms of fair value is associated with devaluation.

“Such a level may be reached during 2021, but the risks of this happening in 2020 are low, we believe. The immediate cause of naira devaluation (as opposed to long-term driver) is unsatisfied demand for dollar and resulting depletion of forex reserves at the CBN, as we observed in 2016,” Czartoryski explained.

However, he pointed out that a gross forex reserve level of $30 billion or less would be dangerous, saying it would restrict the ability of the CBN to supply dollars to the forex market.

He explained that management of forex reserves is linked to the CBN’s setting of market interest rates.

“Currently, Nigeria has a dual interest rate system with the CBN’s open market operations (OMO) bills available only to banks’ proprietary books and to foreign portfolio investments (FPIs).

“The later accounts for a significant proportion of the CBN’s $38 billion forex reserves. If the CBN cannot sell sufficient OMO bills to foreigners in early 2020, then this could, in our view, present challenges to its forex reserve management and dispute the current N362.50 to a dollar exchange rate,” he said.

Czartoryski said the result of OMO bills’ sales to FPIs in January and February 2020, would provide an important indicator of whether the CBN’s forex reserve management was succeeding.

Foreign investors may find OMO yields (currently 14.92% per annum) attractive, but could be deterred by the recent decline in liquidity in the OMO market, he argued.

“Oil prices look set to trade above $60 barrel per day in most of 2020, in our view.

With the potential to sooth investors’ fears about Nigeria’s outlook.

“Continued OPEC cut led by Saudi Arabia are supporting the forward curve which prices oil (Brent) at $62 barrels per day.

“Our core thesis is that portfolio investors (both local and international), are confident about Nigeria’s prospects when oil prices (Brent) are close to $60 barrels per day or above, and unhappy when oil prices fall below this level.

“2019 was a case in point, when markets were generally happy with Nigeria’s profile, but responded negatively to oil falling to $56 barrels per day in early August – net outflows of US dollars from the reserves of the CBN rose that month, as did domestic interest rate around that time.

“But 2019 as a whole was a good year for Nigeria in terms of oil prices. The range of oil prices in 2019 (high: $74.53 barrels per day; low: $56.22 barrels per day), was narrower than in 2018,” he added.

Earlier, the Acting Managing Director, Coronation Merchant Bank Limited, Mr. Banjo Adegbohungbe, said amidst the uncertainty in the global market, occasioned by the Coronavirus, interest rates and oil prices volatility, his financial institution remains committed to identifying the investment opportunities in the country.