After a $4.5 billion shrink in foreign exchange (forex) reserves since February, financial and economic analysts at Renaissance Capital (RenCap) have contemplated further devaluation of naira, saying it is necessary to reflect recent decline in the reserves.
However, in view of developments in global oil market, sentiments in the domestic economy, and responses of the Central Bank of Nigeria (CBN) to ensure exchange rate stability, other experts have disagreed over further devaluation.
They said naira ought to be on a steady rise.
Analysts on the opposing side believe that returning investor confidence as a result of successful handover to new federal administration, expected oil prices rally at $65 per barrel (pb), expected increase in capital inflows, ought to help naira escape another devaluation.
RenCap analysts said in a report that the CBN is likely to move back toward a “managed float versus the managed peg” of recent months.
“Post-inauguration, we think the naira – which has essentially been pegged at N199/$1 since the mid-February devaluation – will be devalued, to reflect the $4.5billion fall in [forex] reserves since the February devaluation,” they explained.
They said a weaker naira implies a build-up of inflationary pressures.
“We see inflation breaching the Central Bank’s inflation target band of six to nine per cent and entering double-digits in Q3 2015. This rules out any prospect of monetary easing in 2015, in our view.”
They explained that the devaluation might be smaller than the market projects (10.15 per cent), because authorities seem to be focused on medium-term fundamentals, which they expect would turn in favour of naira, primarily through a fall in import demand.
They cited agriculture products (via continued improvement in production) and fuel imports (due to 650kb/d of fuel coming onstream from Dangote’s refinery), which account for 60 per cent of forex usage.
The risk to this view, according to them, is that the All Progressives Congress (APC) comes in with a macro policy that requires a much weaker naira; that is, an export-led growth policy.
RenCap analysts also stressed that, as things stand, the government is experiencing a significant cash crunch, whereby it can do little beyond paying salaries.
Given the dependency of exports and government revenues on oil, naira has weakened significantly since June last year.
Analysts at Financial Derivatives Company noted that supporting naira through dollar sales is draining forex reserves and as a result the CBN abandoned its weekly auctions, which effectively devalued the currency.
They explained that despite the 19 per cent year-on-year and 7 per cent year-to-date weakening, “naira still has a way to go to reach its possible fair value of N339 to the dollar.”
However, they said this weakening trend against the dollar could quickly stop, should crude prices stage a sustained recovery this year.
“Thus, the CBN will have to react by using up more of the reserves to support the currency or allow the currency to depreciate further.”