RenCap Upbeat about Naira

By Obinna Chima

Renaissance Capital (RenCap) has expressed excitement over the stability of the naira. The research and investment firm stated this in a report titled: “Weaker dollar improves emerging markets (EM)/Frontier FX fair values,” which assessed the currencies of some emerging and frontier markets that was obtained yesterday.

It, however, argued that the fair value of the naira has dropped from about N360 to a dollar as of the second quarter of 2017, to N385 to a dollar presently.

“Elsewhere we still like Nigeria even 
if fair value of the currency has slipped from around N360/$ in second quarter of 2017, to N385/$ now. It may be seven per cent overvalued, but the current account is in surplus and local yields for one year are 16 per cent.

“Among Frontier 
currencies we are still comfortable recommending naira (fair value has slipped to N385/$ on our 1995-2017real effective exchange rate (REER) model). The current account surplus and double-digit yields mean even further depreciation of ‘fair value’ to N415/$ by end-2018 would still leave the currency at N360/$, at an unremarkable 15 per cent overvalued level.

“This remains a good trade for Fixed Income, Currencies and Commodities (FICC) investors in our view, and we have an overweight for equity investors. If we move on one
year, and assume a roughly eight per cent inflation differential with developed markets (DM) markets, then by end-2018, fair value could move to N415/$. If the nominal rate is unchanged, that would still leave the naira only 15 per cent overvalued, which is not a figure we would make a negative fuss about providing the current account was still in surplus,” RenCap explained.

Economic analysts had predicted brighter economic prospects and a jump in bank lending in 2018.

After snapping five consecutive quarters of contraction, the Nigerian economy grew by 0.72
per cent in the second quarter of 2017 and doubled its output to 1.4 per cent in the third quarter of the year.

The country’s external reserves also grew by $13.73 billion in 2017, from $26.09 billion as of January 3 to $38.731 by December 28, 2017.

The country’s growing reserves strengthen the capacity of the Central Bank of Nigeria (CBN) to intervene in the foreign exchange market and end the forex shortages in the economy.

The CBN, through the creation of the investors’ and exporters’ window and its aggressive interventions, further led to the strengthening of the naira on the parallel market and eventual convergence of the I&E rate with the rate on the streets.

Continuing, the report stated that Egypt’s currency also still looks better, with a 16
per cent undervalued currency, a current account (C/A) largely covered by foreign direct investment (FDI), and interest rates before tax of 18 per cent.

“Ghana also is still interesting with 15
per cent undervaluation, an improved C/A deficit and 15 per cent yields for one year. Turkey too – but only for FICC investors with a one-year horizon, not a one-month horizon. The equity market still seems too expensive given where local bond yields are. Colombia is apparently 39% undervalued – by far the cheapest in EM.

“Tunisia is the cheapest in Frontier. Other questions put to us this week is what will happen to Morocco – not much even if they do belatedly widen the currency bands by a few percent.   South Africa – we’re suggesting 12-13/$ unless Ramaphosa displaces Zuma already this year (in which case it may move stronger than the new fair value of ZAR11.7$) – with a weakening risk depending on the dollar’s move globally, commodity prices and a possible debt rating downgrade.

“We’re OK with Russia – and a little bit interested in very cheap (25per cent undervalued) Ukraine and super-cheap (34% undervalued) Belarus,” it added.