Analysts at Vetiva Research have predicted that despite the downside risks affecting the exchange rate, various policy measures introduced by the Central Bank of Nigeria (CBN) will support the naira in the near term.
Presenting its 2020 second half (H1) Foreign Exchange outlook for the Nigerian economy, Vetiva stated that the pandemic-induced slump in international oil prices has put pressure on petro-currencies.
According to the Lagos-based firm, while petro-economies with flexible exchange rates have already seen significant decline in the value of their currencies, pressure was also mounting on a range of currency pegs–especially those whose reserves asset were perceived by investors not to be sufficient to sustain the quasi-pegs.
Adding to the problem of declining currencies from oil exporters is the fact that emerging markets and developing economies (EMDEs) have lost their luster as the most attractive investment vehicles for global capital, they noted.
“These dual risks to Nigeria’s external sector compelled the CBN to respond to the daunting situation -by embracing some pending foreign exchange (FX) reforms-in a bid to ease pressure on reserves asset, limit the adverse movement in the naira exchange rate and restore confidence in the apex bank’s ability to respond promptly to economic shocks,” the firm added.
Commenting on the development, Vetiva’s Chief Economist, Mosope Arubayi, said downside risks still exists in respect of the naira as external sector factors are currently not favorable and could result in speculation-driven demand for foreign currency. This, according to her, could contribute to existing pressure in the FX market.
Arubayi said: “A sharp drop in resource earnings, cross-border flows and limited global official development assistance (ODA) capacity lends credence to their expectation of further pressure on the Naira in the near term.”
Although she said the scenario was not peculiar to Nigeria, a deterioration in the ratio of Nigeria’s direct investment flows to external debt was expected on account of the anticipated build up in external debt and slow growth in net direct flows.
“However, the gradual recovery in oil prices -as economies re-open –and non-tariff barriers to trade could stem the tide of FX outflows. A projected further deterioration in external sector indicators is a pointer to the fact that FX pressures could persist in the short-term but the risk of a short-term FX liquidity crunch and long run insolvency remains low,” Arubayi said.
She anticipated the re-pricing of the naira to be market-determined, contrary to market expectation of a CBN-induced further devaluation of the local currency before the end of the year.
The expectation, was however, hinged on the oil market recovery not being truncated by a second wave of the Coronavirus.
In a base case scenario, Arubayi expects the naira exchange rate to firm up slightly at both the I&E window and the parallel market to N383.99/$ and N438.00/$ respectively, by the end of the year.
The expectation was however based on sustained recovery in the oil market and global sentiment for risky assets, continued implementation of import restriction policies and the absence of a coronavirus second wave through the rest of the year.