Nigerian Naira Remains Fair Stable, But Downside Risk Abounds - PROSHARE
Naira has remained stable over the past few weeks supported by the gains from higher crude prices (+3.40%MtD to US$68.32 bbl. as of the end of April). The impact of the higher crude prices can also be seen in the external reserves (+0.34%MtD to USD34.94bn), representing five months import cover. Crude oil prices are poised to remain at current levels, on the back of general compliance among OPEC+ members and recovery in global crude oil demand. According to OPEC, global oil consumption is projected to rebound by 6.0mbbl/day in 2021.
Nevertheless, Liquidity levels remain low across the FX strata, due to lower intervention sales by the CBN and weak foreign inflows. On the latter, based on the recent capital importation data released by CBN for January, the total foreign inflow into the country was up 30.9% m/m to US$0.38bn.
In our view, the narrative will likely remain the same for foreign investors, as FX restrictions and measures on FX repatriation continue to undermine confidence and prevent the free flow of capital. For clarity, the average foreign inflow into the I&E window so far in 2021 was estimated at USD60.0m, which remains significantly below the pre-covid levels of USD1.7bn. As such, we expect FPIs aversion to persist, increasing the possibility of further adjustment in the FX rates in the medium-term.
Furthermore, the CBN announced that sugar and wheat will be included in the list of items not eligible for FX in the official market. If implemented, this is likely to save FX worth USD1.9bn. However, the policy will likely push more FX demand to the parallel market, thereby widening the already elevated parallel market premium (17.3%), given that local production of both items is less than 5% of domestic demand.
Finally, the Nigerian Senate approved a US$2.7bn external loan request, comprising of a US$1.5bn World Bank loan and US$1.2bn from the Export-Import Bank of Brazil. This will support the CBN's arsenal to defend the NGN at current levels and help avoid a large currency devaluation. Our currency valuation suggests a 5-7% devaluation by year-end.