A
leading global investment banking firm – Goldman Sachs Group – has predicted
that a significant devaluation of the naira is expected within the next 12 to
18 months.
The investment firm believes this will help bring about “the desired balance”
required to stabilize the currency. This was contained in an exclusive
Bloomberg Terminal report published on Bloomberg.
However, Bloomberg cited the link in an article reviewing the state of
Nigeria’s equities market.
It said: “Goldman Sachs Group Inc. this week said a significant
devaluation of the naira is likely in 12 to 18 months to stabilize Nigeria’s
external accounts. An exchange rate of 500-550 per dollar should bring about
the desired balance…. compared with a current rate of about 407”
The Central Bank of Nigeria had devalued the official exchange rate to N380/$1
from N360.1/$1. The adjustment occurred on August 6, 2020.
The adjustment is thought to be a move towards unification of the multiple
exchange rate windows
The CBN has adjusted the official exchange rate twice this year. The first one
was from N307/$1 to N360/$1 and then just last week, from N360/$1 to N380/$1.
At the NAFEX market were the exchange rate is determined by market forces, the
exchange rate trades between N388-N390 though turnover remains thin.
The SMIS window currently exchanges forex at N380.69/$1 and BDC segment
N447/$1. The parallel market exchange rate has averaged N475/$1 more recently.
Last month, only $937 million was exchanged in July at the NAFEX market
compared to $875 million in June.
Forex analysts suggest pent-up demand for forex is between $1.5 billion to $5
billion some of which include dividends and investments waiting to be repatriated
out of Nigeria.
CBN Governor, Mr. Godwin Emefiele, has promised to meet this demand when
economic activities pick up in the country.
Indeed whilst Goldman Sachs projection is shared by some hawkish analysts, a
lot is still yet to be considered. A reopening of the economy and return to
full economic activities could change the demand and supply dynamics.
The direction of the exchange rate will be determined by oil prices, growth in
the global economy, and Nigeria’s forex policies.
The last time, Nigeria wrestled back from an exchange rate above N500/$1 the
CBN created the I&E window allowing foreign investors to trade forex
freely. The CBN also offered high-interest rates for OMO bills allowing foreign
investors to keep their forex within the country.
The exchange rate disparity is currently due to low forex supply at the BDC,
SMIS, and NAFEX markets respectively.
The scarcity of forex is caused in part by the COVID-19 pandemic, which has
kept foreign investment out of the country limiting the supply available to the
government. If this situation improves, then we could see a convergence between
the parallel market to the NAFEX market with the former strengthening towards
the latter.
However, a further devaluation could occur if forex scarcity persists and
corporates find it difficult to purchase forex at the NAFEX(I&E) window
driving up demand at the black market.
– Agency Report
Naira Sliding to N550/$1, Goldman Sachs Predicts
