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Currencies

Nigerian’s should expect “a significant devaluation” to N550/$1 – Goldman Sachs

Goldman Sachs believes Nigeria will devalue past N500 between 12-18 months.

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Naira, Unify exchange rates to foster economic growth – NISER , OFFICIAL: Banks charge N368 per dollar for debit card transactions

A leading global investment banking firm, Goldman Sachs Group, this week, 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.

According to Bloomberg, “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”. Bloomberg

Nigeria’s one year forward trades at N408.21/$1.

Nigeria’s Forex Challenges

Nairametrics reported during the week that the central bank had devalued the official exchange rate to N380/$1 from N360.1/$1. The adjustment occurred on Thursday, August 6th, 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, the Nairametrics tracker indicates 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 Godwin Emefiele has promised to meet this demand when economic activities pick up in the country.

What this means: According to Nairametrics Research Team, 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.

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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. These scarcity is 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.


Note: This article was updated to reflect new information.

Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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    Currencies

    Naira falls against US dollar as CBN extends Naira4dollar scheme indefinitely

    The exchange rate between the naira and the US dollar, closed at N411/$1 at the I&E Window.

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    Thursday, 6th May 2021: The exchange rate between the naira and the US dollar, closed at N411/$1 at the Importers and Exporters window, where forex is traded officially.

    Naira fell against the US dollar to close at N411 to a dollar on Thursday, 6th May 2021, representing a 50 kobo decline when compared to N410.5/$1 that was recorded on Wednesday, 5th May 2021.

    Meanwhile, the naira maintained stability at the parallel market as it closed at N485/$1, while Nigeria’s external reserve plunged $28.94 million to close at $34.76 billion on Wednesday, 5th May 2021.

    Also, the apex bank issued an indefinite extension to its Naira4dollar scheme for foreign remittances, which was introduced some months ago. This is aimed at sustaining the country’s foreign exchange market liquidity.

    Trading at the official NAFEX window

    The naira depreciated against the US dollar at the Investors and Exporters window on Thursday to close at N411/$1, representing a 50 kobo decline when compared to the N410.5/$1 that was recorded on Wednesday.

    • The opening indicative rate closed at N410.37 to a dollar on Thursday, 6th May 2021, representing a 12 kobo depreciation when compared to the N410.25/$1 recorded on Wednesday.
    • Also, an exchange rate of N420.9 to a dollar was the highest rate recorded during intra-day trading before it settled at N411/$1. It, however, sold for as low as N400/$1 during intra-day trading.
    • Forex turnover at the Investor and Exporters (I&E) window declined by 38.4% on Thursday, 6th May 2021.
    • A cursory look at the data tracked by Nairametrics from FMDQ showed that forex turnover decreased from $172.52 million recorded on Wednesday, 5th May 2021 to $106.34 million on Thursday, 6th May 2021.

    Cryptocurrency watch

    Bitcoin, the world’s most popular cryptocurrency, slumped by 2% on Thursday to trade at $56,358.03.

    • As of 11:31 pm on Thursday, the highly valued cryptocurrency asset witnessed a decline despite soaring as high as 5.5% on Wednesday.
    • However, Ethereum recorded a marginal growth of 0.07% to close at $3,530.75, capitalising on the 9.1% gain recorded in the previous day.
    • The total crypto market capitalisation depreciated by 0.53% to close at $2.33 trillion on Thursday.
    • Meanwhile, payments giant, Visa and financial services provider TALA have partnered to boost cryptocurrency adoption in emerging markets.
    • This partnership is aimed at easing the process of converting, storing and using cryptocurrencies by the underbanked consumers.

    Crude oil price stalls

    Crude oil prices witnessed a bearish trading session on Thursday, 6th May 2021 as the oil price rally stalled due to the worsening covid-19 crisis in India.

    • Brent Crude dipped by 0.97% on Thursday to close at $68.29 compared to its closing price of $68.96 recorded at Wednesday’s trading session.
    • The decline in oil prices, which cut short the rally to $70 a barrel was due to a fresh record of new daily coronavirus cases reported by the third-largest importer of oil in the world.
    • Also, according to energy analytics firm OilX, China’s crude oil imports fell by 11% in April 2021 to stand at 10.41 million barrels per day.

    External reserve

    Nigeria’s external reserve plunged for the 12th consecutive day on Wednesday, 5th May 2021 as it dipped $28.91 million to close at $34.76 billion.

    • The nation’s foreign reserve declined from $34.79 billion recorded as of Tuesday, 4th May 2021 to $34.76 billion on Wednesday, representing a 0.28% decline.
    • Nigeria’s foreign reserve has dipped $497.36 million since 16th April 2021 to date.
    • Nigeria will hope to boosts its foreign reserve position as oil prices continue to rally high and the CBN intensified effort to encourage dollar remittances into the country.

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    Currencies

    How rise in oil prices will impact exchange rate

    Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.

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    Crude oil prices rebound ease investors’ concerns for Nigeria debt market, How substantial is compliance for the Oil market?, Crude Oil price soars high on new COVID-19 vaccine

    Nigeria, Africa’s top oil producer and home to the second-largest reserves on the continent, is expected to benefit from the rise in oil prices in many ways.

    Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.

    Historically, there has been a strong positive correlation between crude oil prices and the performance of the Nigerian economy. For example, when oil prices plummeted due to the COVID-19 outbreak and the implementation of lockdown protocols in 2020, the Nigerian government scaled down the budget to align better with the drop in crude oil price.

    Now that there is a surge in oil price, we should expect that there would be an increase in government revenue translating to a stirring-up of aggregate demand.

    READ: Nigeria records highest trade deficit since 1981

    Why oil price is rising

    The OPEC+ output restrains, despite the strong recovery of oil consumption, continues to give formidable fitting to bullish sentiments about soaring oil prices.

    • Oil prices are rising as optimism about a strong rebound in fuel demand in developed countries overshadows concerns of full lockdown to curb covid-19 in India.
    • Oil (BRENT) has seen a 34.3% increase Year to Date with the oil price at $69.34 showing an increase of +1.15% as of the time of writing this article.

    What it means for the exchange rate

    Perhaps the greatest benefit of the recent oil price rise is exchange rate stability. Since the crash in oil prices began in late 2019, Nigeria’s official currency has faced a barrage of sell pressure as local and foreign investors increase demand for the dollar.

    This forced the central bank to curtain demand, implementing various forms of capital controls across the economy. With oil prices on the rise, Nigerians can begin to expect the following:

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    • An increase in government revenue, which also means higher dollar earnings and thus increased FX reserves. Nigeria’s FX reserve reportedly stands at $34.7 billion as of Tuesday, May 4th, 2021. Soaring oil prices strengthen the exchange rate and promote economic growth. This effect trickles down to higher reserves held by the CBN meant for stabilization of the currency.
    • Higher oil prices could also mean a more stable economy thus propelling economic growth. This, in turn, attracts foreign investor dollars or at least retains what we already have and reduces the pressure on demand.
    • Nigerians have intensified diversifying their currency holdings, keeping less of naira and holding more dollars as they hedge against depreciation. This has kept the pressure on the exchange rate over the last one and a half years. This trend could reverse if oil prices continue their steady rise.

    READ: Dangote: Cement price from our factories is between N2,450 and N2,510 per bag, VAT inclusive

    The implication? The parallel market exchange rate might appreciate closer to the NAFEX rate if this trend continues.

    Hence, it is safe to presume that as the world resume business and travel activities, the demand for Black Gold will continue to increase, and with supply held steady by OPEC+ we can speculate that this is enough catalyst to relieve the pressure of FX demand and increase our foreign reserves thereby propelling growth.

    However, the inclusivity of this growth may still be in question.

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