In 2019, Nigeria’s currency market conditions were relatively stable, thanks to CBN’s continued efforts to intervene via weekly intervention sales, which resulted in over $5.0bn decline in the external reserves in H2-2019 alone. So far in 2020, the external reserves have dipped to $38.3bn as the CBN sustains its intervention. As the year begins to unfold, concerns around the stability of the naira and fears of a possible adjustment are becoming rather apparent.
In our opinion, a devaluation is unlikely in the near-term for several reasons. First, developments in the oil market and the size of the reserves at $38.3bn implies that the CBN can continue to defend the local unit for another 6 months. Again, Nigeria is looking to return to the Eurobond market in Q1-2020, to support the implementation of the 2020 budget. This will support the reserves and boost dollar liquidity. Finally, the CBN’s current mix of heterodox policies implies that OMO Bills can be exchanged for dollars to preserve the reserves.
The above notwithstanding, we do not rule out a possible harmonization of the FX rate at the official window to the I&E window rate, if the pressure in the currency persists. Overall, our outlook for the naira is stable in the near term, with a potential harmonization across rates in the mid to long term.
United Capital Research