Agusto & Co has predicted a gradual downward adjustment of the official exchange rate to ₦480-500/$ and a simultaneous increase in FX supply.
The credit rating agency stated this in its 2023 Outlook report tagged ‘Nigeria, a Nation on the Precipice’ and obtained by the Nairametrics.
Value of naira: The agency noted that the downward adjustment would signal a willingness to shift ground and would likely trigger an appreciation of the naira in the parallel market to N650-680/$21.
- “Forecasting the value of the naira is a bit tricky as the protectionist leanings of the current administration have swayed the CBN’s dogmatic obsession with holding on to the value of the currency. All three leading presidential candidates, on the surface, appear willing to ‘allow’ for a more market-determined exchange rate.
- A successful election would ease frayed nerves and bolster investor confidence. We forecast a gradual downward adjustment of the official exchange rate to N480-500/$ and a simultaneous increase in FX supply, which would signal a willingness to shift ground and would likely trigger an appreciation of the naira in the parallel market to N650-680/$21. This would narrow the parallel market premium and curb speculative activity,” the agency said.
The task before the next president: Agusto & Co noted that the next president’s first order of business will be to confront Nigeria’s economic challenges, which are the culmination of multi-decade structural and policy weaknesses.
- “In the last few years, structurally high inflation has been exacerbated by elevated global commodity prices, currency weakness and the impact of the rising spate of insecurity on food production. This has left the average Nigerian significantly poorer as GDP per capita, at $2,418 in 2022, is still lower than 2019 levels of $2,5055. This is currently contributing profoundly to a wave of emigration by Nigerians, in search of greener pastures, which now threatens several critical sectors of the economy, particularly healthcare,” the agency said.
Subsidies removal: The credit agency said the removal of subsidies, and the attendant incentive for smuggling, should finally bring an end to the confusion over how much petrol is actually consumed in Nigeria and, in theory, should also right-size petrol imports (which account for 15% of the total import bill), conserving valuable foreign exchange.
- “However, the launch of the 650,000bpd Dangote refinery in January 2023 is a potential game-changer as it could completely eliminate Nigeria’s petrol imports. This hinges crucially on the complete price deregulation of petrol as the export market presents a significant opportunity that will be virtually impossible to pass up. The 60,000bpd Port Harcourt refinery is also expected to be completed and back on stream in Q1’2317,” the agency said.
Growth projection: The agency said that the World Bank has revised its economic growth projection for Nigeria downwards to 2.9% from 3.2% initially stated in June 2022 adding that it has a slightly more optimistic forecast, at 3%, and believes GDP growth will be supported by election spending, improved oil output (to 1.3-1.4mbpd) and still high oil prices ($88pb20) but will be constrained by low investment and productivity.
- “How quickly Nigeria can stem rampant oil theft and vandalism will be crucial to boosting foreign exchange earnings and providing the CBN with enough ammunition to intensify its interventions in the forex market. However, we expect high global interest rates to continue to limit capital inflows and add to currency pressures in 2023,” the credit agency said.
Insecurity: Agusto & Co noted that Nigeria’s insecurity challenge will continue to be a major issue 2023adding that it worsened in 2022 and is now rife in many sections of the country.
- “The scale of the challenge will require a two-pronged approach – deploying resources to military artillery, personnel and intelligence; while also confronting the more deep-seated problems of pervasive poverty, high unemployment and extreme levels of inequality,” the agency said.
