Market News

The naira is set for a major rebound following the successful issuance of $500 million diaspora bond, and return of the Retail Dutch Auction System (RDAS), analysts have predicted.

In an emailed note to investors released yesterday, Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, explained that while a possible rate cut by the US Fed offers positive implications for Nigeria, efforts by the Central Bank of Nigeria (CBN) to boost foreign exchange (forex) liquidity are expected to further support the naira in the coming weeks.

According to the report FDC Economic Bulletin for August, shared by Rewane, the $500 million diaspora bond has been issued to boost remittances and attract investment.

He said: “The proceeds from the bond issuance, coupled with the CBN’s reintroduction of the Retail Dutch Auction System, which is expected to hold another auction in September, will stabilise the naira. A sustained naira stability will ease price pressures, with inflation slowing throughout the remainder of 2024. The slowdown in inflation will be supported by the harvest season, base effects, and an import duty waiver.”

The report said Nigeria is part of the global financial community that is awaiting the outcome of the US Fed meeting to be held in September.

“The consensus view is that there will be an interest rate cut, though opinions differ on the magnitude. While some analysts believe that rate will be cut by 25 basis points (bps), others anticipate a 50-bps rate cut. Regardless, an interest rate cut will weaken the US dollar and, by implication, strengthen the naira, which is currently trading at N1,625/$,” the report said.

 “Additionally, the global price of oil and other export commodities will rise, improving Nigeria’s trade balance and bolstering revenue. This is coming at a time when Nigeria has a debt problem. With a weakened US dollar potentially easing external debt repayment pressures, Nigeria could see some relief in servicing its debt obligations,” it added.

Despite the projected deceleration in inflation, analysts at FDC expect the MPC to maintain a tightening stance in its next meeting in September.

“This could pose a threat to the country’s growth prospects. The recently released GDP report showed an expansion of 3.19 per cent compared to 2.98 per cent in first quarter of 2024 and 2.51 per cent in second quarter of 2023. However, the stark reality is that 78 per cent of the 46 economic activities tracked by the NBS experienced either a slowdown or contraction during the quarter.

“This widespread underperformance is particularly concerning as it involves “labour elastic” sectors—industries where changes in economic activity have substantial impact on employment levels,” FDC stated.

The slowing sectors, including agriculture (1.41 per cent as against 1.5 per cent in second quarter of 2023), trade (0.71 per cent as against 2.41 per cent in second quarter of 2023), and manufacturing (1.28 per cent as against 2.2 per cent in the second quarter of 2023), are struggling with deep-seated structural challenges.

The report explained that these persistent issues not only hinder sectoral performance but also cast a long shadow over job creation and economic stability.

The CBN has also taken strategic steps to tame exchange rate volatility to achieve sustainable recovery for the naira.

It recently authorised dealers to pay personal and business travel allowances to their customers through debit or credit cards instead of cash is expected to reduce round-tripping, wastages and boost dollar liquidity.

There was also a directive for international money transfer operators   to maintain a minimum operating capital requirement of $1 million and to operate in the formal market instead of the informal market. This was to foster confidence in the market and close the gap between the official and the black forex market.

Also, the CBN-led Monetary Policy Committee has consistently raised the Monetary Policy Rate (MPR) why modifying other key rates. The benchmark interest rate was raise by 600 basis points to 26.75 per cent, action meant to ease inflation, boost foreign capital inflows and gradually correcting exchange rate misalignment.