The currency market was mostly stable in H1-19, as the Central Bank of Nigeria (CBN) stayed committed to defending the naira via frequent wholesale and retail FX intervention. Notably, the external reserves improved 4.5% YTD in H1-19, driven by an unexpected uptick in oil prices and foreign portfolio inflows.
Yet, the stability of the naira and possibility of a near term adjustment remained the biggest issues on the mind of investors interested in Nigeria. Specifically, the concern revolves around the multiple exchange rates regime where the official rate trades at a wide margin to the I&E rate, possible harmonization & devaluation, and the final concern is tied to the complexity and transparency of the current exchange rate regime as well as the need for simplification and more clarity.
With the above in mind, our view is that the Apex bank will maintain the status quo (defending the naira) for now. Certainly, with the anticipated pressure on recurrent spending, following the recent approval of the minimum wage bill, collapsing the official rate from N305.5/$1 to N360.0/$1, maybe a strategic move by the government to rebalance its revenue/expenditure profile in the medium term.
While the decision of the authorities on this remain unclear, we maintain our view that the outlook for the naira is stable in the near term but not in the medium-term.
United Capital Research