Bank of America says naira now undervalued after float

The Nigerian naira has moved from being overvalued to undervalued following the government’s long-awaited foreign exchange reform, analysts at US-based Bank of America said in a June 28 note to clients.

“We now see a USDNGN fair value of 680 per USD (previously 580). However, USDNGN is likely to trade above this level, with year-end 700, and a return to 650-680 in early 2024,” the Bank of America (BOfA) analysts said.

Since Nigeria floated the naira on June 14, the currency has weakened by over 60 percent compared to the N460 per USD level it traded before the reform. On Tuesday, the currency closed at N780 per USD, according to FMDQ data.

The Bank of America’s fair value estimate of N680 means the naira is now 12 percent undervalued.

“The caution is transition time, aligning rates and still to unlock more USD into the formal market will take some time. When the dust has settled, the value of the naira should be stronger and appreciating,” the analysts added.

According to Bank of America, higher oil exports ($12 billion more) and a liberalised import regime ($10 billion increase in non-oil imports) can still result in consistent current account surpluses over the medium term which will boost dollar inflows required to support the naira.

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“An addition of $12-13 billion on export revenues from higher oil production is moderated by a liberalised imports regime that could add $10 billion as non-oil imports increase. Still a net gain of $2-3billion that strengthens the current account surplus,” the BOfA analysts said.

On June 13, Nigeria decided to float the naira, a marked departure from years of a currency peg that spooked foreign investors and hurt the economy.

Standard Chartered Bank is also of the view that the naira is undervalued following the float and expects the currency to strengthen to N685 per US dollar as Nigeria quickens the pace of implementing reforms needed to fix its foreign exchange market.

“We now forecast USD-NGN at 685.00 at the end Q2-2023 (from 480 previously), rising to 720 in Q3-2023 (520 prior), before appreciating thereafter as the market stabilises,” Razia Khan, head of research, Africa & Middle East and Samir Gadio, head of Africa strategy both at Standard Chartered bank said in a June 14 note to investors.

Nigeria’s bold move towards achieving a unified exchange rate after years of a multiple exchange rate practice drew the criticism of economists is the latest of a list of reforms by new President Bola Tinubu who has also scrapped a costly petrol subsidy program.