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Naira’s fortune tied to oil in 2019

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Analysts in the financial services sector said the price of crude oil and the political environment would determine the outlook of the naira in 2019.

Crude oil prices have slid to $55 a barrel from a four-year high of $86 in October on signs of excess supply. Where prices to remain sticky at $55 per barrel, not only does it threaten the federal government’s revenues, it also places a cap on dollar supply.

Oil exports account for the single largest inflow of dollars into the country. An OPEC-induced production cut which limits Nigeria’s production to 1.6 million barrels daily would also reduce dollar supply even as rising global interest rates take their toll.

So far, the naira has managed to stay relatively unscathed amid a rout in emerging market currencies but the pressure could be on this year.

Naira is currently trading around N306 per dollar at the official forex window of the Central Bank of Nigeria (CBN).

A report by FSDH research stated that Nigeria may lose a substantial amount of its projected crude oil revenue due to a limit on crude oil production and the drop in the global crude oil price.

This may also lead to a drop in the supply of foreign exchange into Nigeria, resulting in a possible depreciation or devaluation of the Naira.

The firm advises Nigerian businesses to look for local alternatives, where possible, for the raw materials needed for their production process. They should also limit or eliminate foreign debt, particularly if they do not have foreign exchange receivables to mitigate the possible foreign exchange risk.

FSDH Research also advises that businesses should put in place appropriate foreign exchange hedging strategies.

The key major event that will shape the Nigerian political environment this year is the general elections scheduled to commence in February.

“Naira outlook is not quite strong. The outlook will depend on two factors – price of crude oil and political environment,” Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited told BusinessDay.

He said in the absence of capital inflow, naira could come under pressure as the external reserves will be depleted.

However, Chukwu said inflow of capital depends on the political environment, adding that if the elections are successful, the parties accept the outcome of the elections and there is economic policy shift, then the foreign portfolio investors would return.

The U.S dollar-naira exchange rate is projected to depreciate to N380 in 2019 from N360/$ in 2018 by Absa research, an arm of the Absa Group Limited, one of Africa’s largest diversified financial services group based in Johannesburg, South Africa.

Though the CBN has so far managed to maintain exchange rate stability, the current capital flow reversals from emerging markets is expected to continue to exert considerable pressure on market rates. This pressure could be amplified by the forthcoming elections, especially as the political market place heats up.

Notwithstanding these pressures, the CBN said it is determined to maintain its stable exchange policy stance over the next few months given the relatively high level of reserves. Gross stability is projected in the FX market given increased oil related inflows and contained import bill.

“I will like to make it categorically clear that “sustaining a stable exchange rate is of overriding importance to us even as we continue to put measures in place to shore up reserves,” Godwin Emefiele, governor of CBN said on November 30, 2018.

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