Nigeria wont devalue naira, but harmonize rates, Analyst say

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The naira is likely to be harmonised with the dollar this year, according to analysts’ prediction.

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United Capital Limited’s ‘Nigerian Economic Outlook for 2020 released on Monday however ruled out naira devaluation.

The report titled: Nigeria Economic Outlook 2020: A Different Playing Field, said while devaluation is unlikely in the immediate-term, there is a possibility for the harmonization of the official rate from N305.5/$1 to something very close to the Investors’ & Exporters’ forex window rate of N360.0/$1 in the medium term.

The naira exchanges at N306/$1 at the official market but has depreciated to around N363/$1 in the parallel market as a result of pressure from declining foreign reserves.

Nigeria operates a multiple exchange rate regime, which the Central Bank of Nigeria (CBN) has defended.

But the International Monetary Fund (IMF) advises a unified exchange rate.

IMF Nigeria Senior Resident Representative and Mission Chief, Amine Mati, believes a unified exchange rate will impact the country’s economy more positively than the multiple exchange rate regime

Even the Economic Recovery and Growth Plan (ERGP) also expects Nigeria to move towards a unified exchange rate regime.

According to the United Capital report, the exchange rate adjustment may not really affect the market rate by more than a spread of two per cent to five per cent to the official rate.

“Overall, our outlook for the naira is stable in the near term with a potential harmonisation in the medium – to – long term,” it said.

Also reinforcing the view on naira stability and harmonization, Head Research at Coronation Merchant Bank, Guy Czatoryski, explained that the CBN is likely to keep naira stable and hold the exchange rate at close to the current N360/$1 for at least the first half of 2020.

He explained that high risk -free naira denominated interest rates are still available to foreign investors as they are still allowed to buy CBN’s open market operation (OMO) bills.

In an emailed report to investors, Czatoryski said there are question marks over foreigners’ comfort with the new rules, which may prove significant as foreign portfolio investment is important to maintaining the CBN’s forex reserves.

“The CBN has other routes to foreign exchange, and although the pressure on reserves recently has been strong, we believe the CBN can hold the exchange rate at close to the current N360/$1 for at least the first half of 2020,” he predicted.

On capital flows, United Capital said no significant change is expected in the current dynamics, adding that the CBN is likely to sustain its Open Market Operation sale to Foreign Portfolio Investment in support of the reserves.

This may keep Foreign Portfolio Investments interest dominant in money market funds at the expense of equity flows.

It said: “On the exchange rate and capital flows, we expect the CBN to continue to support the naira at N360-N365/$1 levels, by selling OMO bills to FPIs (Foreign Portfolio Investors) as a strategy to preserve the reserves at decent levels.

“At the current run rate, this can be sustained for another seven to nine months, all things being equal. Nevertheless, we acknowledge the growing concern about an impending devaluation of the naira.”

On the performance of the equities market within the year, the report said 2020 is a different playing field for capital market players.

“The fixed income market will be a corporate/ private issuer market due to the buoyant level liquidity and the low yield environment. Yields on Federal Government of Nigeria T-bills are projected to stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in first half of 2020,” it said.

The analysts said their outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch.

From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity.

However, this will not be enough to trigger a major rally in the absence of the demand from FPIs.

The United Capital report added,”Overall, our base case scenario, sees equities market return at 5.3 per cent in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.

“Hence, interest in riskier assets, mostly corporate papers, will increase.

“The rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in first quarter of this year while preserving the stock of reserves above the $30 billion threshold.

“Overall, we expect the sovereign yield curve to remain normal in first half of 2020.”

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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