RenCap

Naira undervalued, expect soft year-end rally – RenCap

By Emeka Ucheaga, Sobechukwu Eze, Abdullateef Eniola-Giwa & David Ibidapo

Renaissance Capital in its recently published currency watch report (Thoughts of a Renaissance Man) stated that Naira is currently undervalued in Investors & Exporters exchange rate window. RenCap fair value estimate of the local currency is N322 to $1 versus its current spot price of N361 to $1.

 Despite an undervaluation of almost 11 percent, RenCap forecast Naira to rally only 2 percent this year due largely to capital outflows from emerging and frontier markets along with increased political risk in the country in the lead up to the 2019 general elections.

 Investors who are likely to cut back on their exposure to Nigeria financial markets during the elections may likely increase foreign exchange pressure in the country thereby restraining the rally in the local currency.

 Naira which has been hammered in recent years has enjoyed rare stability since the beginning of the year appreciating by 0.23 percent in the first half of 2018.

The stability in the exchange rate market is attributed to rallying oil prices which has helped Nigeria’s foreign reserves to swell to $47 billion, thereby boosting investor’s confidence in the economic strength of the nation.

 Omotola Abimbola, fixed income and currency specialist at Ecobank Transnational shared similar sentiment as RenCap on Naira undervaluation. Although he agrees that Naira is grossly undervalued when considering the pool of external reserves and the current account surplus in Nigeria, he opines that the possibility of a Naira rally this year is unlikely.

 Abimbola told BusinessDay that a Naira rally before the election will be very difficult considering the headwinds from around the world. Abimbola pointed to increase foreign outflows as investors exit EM markets to enjoy better yields in the West as America, Europe and Japan continue to tighten monetary policy. Investors avoiding political risk will also repatriate their funds for safety reasons, putting pressure on Naira.

 Abimbola said that Naira missed its chance to rally against the dollar in Q1 when foreign inflows entered the country at record pace, but the apex bank prevented Naira from strengthening for obvious economic reasons. If the Central Bank of Nigeria (CBN) had allowed Naira to strengthen, it could have caused imports to surge in subsequent quarters.

However,  Wale Okunrinboye, Head of Research Sigma Pension opines that “the Naira is fairly valued at its current price and as long as the oil prices continues to stay above $70, coupled with the CBN foreign currency intervention program, the Naira would not rally far from its current position.”

Since Q1, foreign capital outflows have outstripped inflows, as falling local currency yields, increased political tensions, insecurity in North Central and rising yields in developing markets has sent investors out of Nigeria.

Analysts opined that a convergence of all exchange rates after the general elections next year will be very healthy for the currency market and could trigger increased confidence in Naira.
https://www.businessdayonline.com/exclusives/article/naira-undervalued-expect-soft-year-end-rally-rencap/