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Published On: Sun, Mar 4th, 2018

Naira: Analysts predict further depreciation

By FELIX OLOYEDE

Foreign Exchange traders are already factoring the negative impact of the forthcoming general elections in 2019 on the economy as foreign exchange future prices indicate a fall in the value of the naira as election campaigns heat up during the year. Future prices on the FMDQ OTC trading platform suggest market traders are basically bearish.

The naira continued to weaken at the futures contract window, losing almost 1 per cent to $/N363.09 in the OTC FX futures Contract for February 27, 2019 as quoted on the FMDQ on Friday. Market analysts note that the decline has been minimal because of a significant improvement in the country’s foreign reserves, which has soared to $42.35 billion on the back of stable oil production output and international oil prices hovering between $60 and $70 per barrel within the year. The country’s foreign reserves have risen by over 40 per cent in the past six months.

Nevertheless, there are fears that as the elections get closer, there would be a run on the local currency as politicians who usually mop-up dollar to finance their elections go on a buying binge. And foreign portfolio investors who would be apprehensive of the uncertainty that surrounds the outcome of the elections take flight, thereby putting downward pressure on the naira.

“Politics will definitely have an impact on the naira. But I don’t expect the election to have much impact because our foreign reserves have gone up significantly. There would, however, be a certain amount of wariness amongst foreign investors. Many of them would just maintain a hold and watch position and a few may embark on capital flight, because they are not sure of electoral outcomes,” says Moses Ojo, head, Investment Research and Business Development, PanAfrican Capital Plc.

He believes there won’t be any major skirmish during or after the elections, but there would be uncertainty on whether there would be continuity or a change. “So, we expect foreign investors to embark on subtle capital flight which would negatively impact on the naira. It is to that extent we will see a weaker naira. But we expect the federal government to commit more dollars to meet emerging demand” he surmises.

“There is always political risk when elections are drawing near. For offshore investors who have some portfolios here would likely repatriate some of their funds and stay on the sidelines and wait for a bit of direction before returning. Because of that reaction, there is always a bit of a scare factor that impacts on the naira,” Oluseyi Akinbi, analyst, Zedcrest Capitals Ltd told Business Hallmark. He projects that the value of the naira may decline to between $/N375 and $/N380 as the country moves closer to election days, which is expected in February 2019.

He, however, adds that the Central Bank is in vantage position to better defend the naira, having spent over $15 billion defending the local currency since April 2017.

The naira appreciated 0.03 per cent against the dollar to N360.03 at the Investors’ and Exporters’ Foreign Exchange (I&E) Window on Friday, but has remained stable at $/363 since February 27 at the parallel market.

There has been relative stability in the Nigeria’s foreign exchange market with the introduction of the Investors’ and Exporters’ Foreign Exchange (I&E) Window in April 2017, where the naira is believed to be fairly priced.

“In 2017, more prudent use of forex reserves, vigorous funding of food production and manufacturing by CBN, introduction of a more flexible forex market especially the I&E Window were key,” claimed Isaac Okorafor, acting director, Corporate Affairs, CBN on his twitter handle. He noted that the apex bank is working at closing the gap between the CBN Window which was $/N305.85 on Friday and other forex windows in the country. The spread between at the Nigerian Autonomous Foreign Exchange (NAFEX) Window and the parallel market has drastically narrowed since the former was introduced in April last year.

“I don’t envisage any turbulence in the forex market. Usually what we have is increased spending. So the challenge would be inflation not a run on the naira. Money will not be coming from abroad for politics. With the watchdog on the prowl, I don’t think people will be willing to parade their ill-gotten wealth. I don’t think there would any shock that would impact on the naira negatively,” Adi Bongo, economist and member of faculty, Lagos Business School.

In the same vein, “We are not really expecting political activities to affect the naira because with the launch of the I&E window in April last year, we have seen stability in the exchange rate because the naira is now considered to be fairly valued. And the external reserves are also strong due to increases in oil production and strong and stable oil prices,” maintains Ayobami Ayorinde, analyst, Research and Securities, Afrinvest (W/A) Ltd.

“But usually in an election year, government spends a lot of money to try and win the heart of the people. So, we may see the CBN doing a lot of mopping up of money from circulation by maintaining a tight monetary policy. It would impact the financial market because many foreign portfolio investors would movement out before the election watch the outcome of the election before coming back.

“The demand for fx before the election would be majorly from foreign portfolio investors who want to repatriate their money but this would have minimal impact of the FX market because the CBN has a lot of dollar reserves to be able to meet demand.  In 2015 CBN had serious challenge meeting FX demands because of the significant drop in oil price and production output,” he averred.

 

 

 

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