The Nigerian naira could weaken to 850 per dollar by the end of the first half of 2024 due to balance-of-payment pressures and declining foreign-exchange reserves, South African lender Absa Group said in an investment note on Wednesday.
(Bloomberg) — The Nigerian naira could weaken to 850 per dollar by the end of the first half of 2024 due to balance-of-payment pressures and declining foreign-exchange reserves, South African lender Absa Group said in an investment note on Wednesday.
Nigeria may struggle to offset pent-up dollar demand with portfolio inflows, particularly into domestic bonds because of their low yields that are well below the current monetary policy rate of 18.75%, Absa analyst Nikolaus Geromont said in the report.
The West African nation on Wednesday sold 255 billion naira ($338 million) of one-year treasury bills at a yield of 12.15%, a day after the central bank raised its benchmark rate by 25 basis points as part of its longest cycle of monetary tightening in years in a bid to curb accelerating inflation.
“Domestic bonds would need to price in more risk premium to attract global investors,” Geromont said.
Inflows into the foreign-exchange market haven’t been sufficient to meet a backlog of demand, Folashodun Shonubi, acting governor of the central bank, told reporters on Tuesday in Abuja, the nation’s capital, following a meeting of the monetary policy committee.
That’s added to exchange-rate volatility, which has seen the naira fluctuate widely between 742 and 804 against the dollar since June 15. A day earlier, the central bank said it would allow the currency to trade freely in the so-called investors and exporters window.
Shonubi said the central bank will only intervene in the market to keep the exchange rate at a “fairly stable level.”
“We have started intervening and we’ve been doing it for a while, and we will continue to intervene to bring the markets to the levels that we believe it should be” at, Shonubi told the briefing.
The persistent gap between official and an unofficial rate of the naira indicates “there is still appears to be a large backlog of dollar demand,” Absa said.
Unmet dollar demand in the Nigerian foreign exchange market may be as high as $12 billion, Goldman Sachs Group Inc. said in a report early this year.
The central bank’s aim is to encourage market efficiency and help the naira find its level, Shonubi said, noting that “we’re not trying to unify any rates.”
An increase in dollar supply to the official market would go a long in helping stabilize prices, said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Plc.
“While this appears to be the intent of the authorities, faster action is needed now in order safeguard the FX market liberalisation measures already announced,” Khan said.
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