• Monday, June 24, 2024
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Saving in dollars implies a bleak economic outlook, says Coronation

Saving in dollars implies a bleak economic outlook, says Coronation

Analysts at Lagos-based Coronation Research have said that selling the naira to buy the dollar equals paying more than its fair value, and signifies a bleak economic outlook.

The naira’s current value against the dollar is abnormal and unprecedented given the range it has traded in the last 13 years, their analysis shows.

According to the Coronation weekly update, selling the naira to buy the dollars just to save implies the belief that the naira will not appreciate and will continue to be very cheap in fair value terms.

“One might buy the dollars because it is necessary, but doing this only as a saver implies several assumptions; inflation will remain a threat (because of the contribution of imported inflation); foreign-sourced goods and services will continue to be very difficult to afford; companies’ costs are likely to rise due to imported inflation; companies’ profitability is likely to decline,” the report said.

The report recommended that savers who intend to save in naira take advantage of the yields on treasury bills and OMO bills, which have performed better this year than in the last four years, although the yields are low compared to the inflation rate.

“The good news is that in terms of Naira fixed income, 2024 is a much better year than any of the past four in terms of what can be earned on T-bills and OMO bills. The bad news is that, while a 1-year T-bill yield at 25.07percent is double anything achievable last year, it still falls short of the inflation rate at 33.69percent, so the inflation-adjusted return remains negative,” it stated.

However, the report stated that saving in Naira is a rosy economic outlook, owing to the belief that the Naira inflation will be beaten.

“By contrast, the positive decision to save in Naira implies several things: the raising of market interest rates by the CBN will be effective; declining inflation will make the fair value of the Naira look even cheaper than at present,” it said.

The FX market is currently facing increased demand pressures, causing a continuous decline in the value of the naira.

On Friday, dollar supply surged to a two-month high of $556.25 million, rising by 231.99 percent from $167.55 million recorded on Thursday, according to data from FMDQ Securities.

The naira was quoted at N1,482.81/$ compared to N1,485.66/$ quoted on Thursday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), according to the FMDQ Securities Exchange Limited.

In an attempt to stabilise the naira, the Monetary Policy Committee has raised the Monetary Policy Rate by a total of 750 basis points since February, bringing the MPR to 26.25 percent.

During the recent MPC briefing in Abuja, Olayemi Cardoso, governor of the Central Bank, said the committee members observed the recent volatility in the foreign exchange market, attributing this to seasonal demand, a reflection of the interplay between demand and supply in a free market system.

Traders have attributed the naira’s weakness to the scarcity of dollars and strong demand in the parallel market.

“The demand is very, very high. There are dollars but it is not enough to cover the demand,” a street trader earlier told BusinessDay.