International credit rating agency, Fitch Ratings, is projecting that the naira, will end the year at 1,450 per dollar.
Gaimin Nonyane, the director, sovereigns, at Fitch Ratings revealed the projection at a Nigeria and Egypt focused post-sovereign rating webinar Tuesday.
Speaking on the trajectory of the naira which has been volatile since it was floated June last year, Nonyane said the currency is still in price discovery mode.
“Naira is still finding its feet. It is still in price discovery mode. So we would expect a lot of volatility in the near term. However, as I just mentioned, there is the expectation of multilateral donor funding coming in Q3 this year in addition to improved oil receipts. So that should help to reduce volatility somewhat by Q3 this year,”she said.
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“We project that naira will average about 1200/dollar this year and end the year round 1450/dollar.”
Nonyane added that the currency’s direction from there will depend largely on the foreign exchange reforms momentum.
“So, this is our baseline scenario on the basis that the momentum continues at the current pace,” she said.
The rating pointed at sustained stability of the naira a factor that will see the currency upgraded in future.
“Currently, we see a path to a sustainable recovery in CBN foreign exchange position. And sustained current account surpluses. Currently, the current account surplus is low, below one per cent of the GDP, although they are experiencing some surpluses, it is still not significant in addition to that, if we see a sustained reduction in inflation and greater stability in the foreign exchange markets, and one key factor is the tax revenue. We need to see stronger mobilisation of domestic non-oil revenue. So all of these combined collectively, it’s not one or the other, which could potentially lead to an upgrade,” Nonyane said.
Last month, Fitch Ratings revised the Outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to Positive from Stable, and affirmed the IDR at ‘B-’, on the back of reforms in the foreign exchange market, oil industry and monetary policy over the past one year.
“Low tax revenue base has contributed to the government’s very high interest-to-revenue ratio which currently stands at 38 per cent and that is quite high. This is about four times more of the B rating median and forms a key rating consideration,” Nonyane added.
The rating recommended securitisation of NGN22.7 trn (11% of 2022 GDP) CBN overdraft, 9% interest (and 3-year grace period on principal) as some of the steps to contain fiscal risks.
Fitch Ratings projected recovery in the oil sector with Dangote refinery’s boosting capacity as one of the enablers.
“We do expect a recovery in the oil sector to support the current account over the short term. We also expect the oil refining capacity to increase over the short term as the Dangote plant ramps up capacity. We expect the PMS to come on stream later this year or early next year and this would help to reduce transport costs and lower refined oil imports which should help to ease foreign exchange demands,” the director at Fitch Ratings said.
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Nonyane mentioned that the gross foreign exchange reserves have fallen from its peak in March at about $34bn and it is currently standing around $32.7bn with recent gains from oil receipts eroded by repayment of existing debt obligations as the Central Bank of Nigeria repaid draw down on foreign exchange swaps and foreign exchange sales to Bureau De Change.
She said: “In terms of the outlook, we project foreign exchange reserves to rise modestly by year-end and this would be as a result of a recovery in oil receipts, multilateral funding and potentially commercial borrowing. This would equate to about 4.2 months of current external payments which is still in line with our B-medium but following the CBN’s recent publication of its financial statement, we still estimate that more than 30 per cent of the gross reserves are from bank swaps, this highlights an external risk. Although we do expect the majority of the swaps to continue to be rolled over, providing space to navigate some challenges in external debt servicing.
“External debt servicing is expected to rise by about $4.8bn in 2024 and a further $5.2bn in 2025 and this includes amortisation and the $1.1bn Eurobond which would be due in November 2025. So sustaining the foreign exchange momentum is key.”
