Naira risks mostly priced in, foreign inflows expected to improve

As oil prices bottom and the US slowly adopt a tighter monetary policy, the risks to the Naira are expected to reduce, with the NGN seeing greater stability post-elections.

Emerging market currencies will stay under pressure in 2015, according to a Reuters poll conducted last week, however, EM currencies will not fall as much as they did in 2014 as lower commodity prices and tighter monetary policy in the United States could be largely priced in already.

Oil has plummeted more than 50 percent since mid-2014 but is expected to bottom out before year-end. Also, the Federal Reserve has announced expected 2015 rate hikes.

According to a Lagos-based currency analyst, “the possibility that emerging market currencies actually strengthen later this year is higher than in 2014, especially as the US Fed plans to tighten monetary policy slowly. On the other hand, the price of oil is expected to reach a bottom sooner than later”.

He however adds that the NGN is not expected to strengthen to previous levels, albeit on the long term, structural changes, like the diversification of the sources of FX revenues would strengthen the currency.

According to the CBN governor, the NGN is ‘currently appropriately priced’ and no new measures are being considered.

“We are satisfied with the current adjustment that’s been done,” Godwin Emefiele said. “It remains a free entry and free exit market.”

The CBN moved the midpoint of the NGN-USD trading band from N155 per dollar to N168 per dollar. At the same time, the trading band was widened from +/- 3 percent to +/- 5 percent.

A new rule was also adopted around the same time that dollars bought in the interbank market be used within 48 hours or sold to the regulator.

Additionally, the CBN mandated that banks to clear foreign exchange positions daily, having previously allowed a net-open position of 1 percent of shareholder funds.

According to Samir Gadio, head of African strategy at Standard Chartered Plc, the move made it difficult for non-Nigerian investors to exit their holdings.

“For those who remain in Nigeria, it has become virtually impossible to get out.

“There’s a risk that these measures last as long as the central bank feels it doesn’t have the ability to control the exchange rate”, he said in an interview with Bloomberg.

The CBN governor has however stated that a review will be carried out in due course and that Nigeria will never introduce capital controls.

“But I can tell you categorically [the net open position] will no longer be 1 per cent,” Emefiele adds.

According to a recent research note released by Standard Chartered, the NGN is forecasted to depreciate by 15 percent in Q1 2015 to N190 per dollar before strengthening gradually to N185 by Q4 2015.

Additionally, the report points out that FDI inflow would be headed for planned projects in the transportation, construction, refinery and petrochemical sectors. Also, investment in the power sector is likely to pick up further over time.

The oil and gas industry and the capital market has historically accounted for the bulk of FDI inflows.

The report however points out that these projects will have a significant import component, which will weigh negatively on the current account balance in the initial phase.

YINKA ABRAHAM