At N360/$1, Naira 14% Undervalued, May Weaken By 2018FY, Says Rencap

A new report by Renaissance Capital on Monday, September 11, 2017 says Nigeria’s Naira is 14% undervalued at N360/$, citing its 13-year real effective exchange rate model.
“We think a stronger external sector and tighter monetary policy imply naira appreciation risk in the near term, and as such, we revise our YE17 FX rate forecast to NGN332/$1 vs NGN447/$1 previously,” warning that with oil output and price moving sideways the Naira could weaken by 2018.
“However, in 2018 – when we assume accommodative policy, and that oil output and price move sideways – we expect the naira to trend weaker.
The Rencap research titled: Economics & Politics Research, forecast that Nigeria’s foreign exchange rate could weaken to as low as NGN373/$1 by the end of 2018, “assuming monetary policy becomes accommodative and little upside for the external sector.
“We think it is probable that instead of appreciating in the near term, the naira weakens gradually to NGN373/$1 at YE18, which would signal price stability. The central bank governor, Godwin Emefiele, expressed a desire for policy easing in a mid-2017 monetary policy committee (MPC) statement, but thinks appropriate liquidity conditions should precede it.
“We believe the YtD tightening of naira liquidity is the paving of the path towards rate cuts. So, we are revising our YE17 policy rate forecast to 13% vs 14% previously.”
We think a rate cut is more likely in November, than at the 26 September meeting, in part because inflation remains elevated. We think another 1-2 ppts is likely in 2018. We expect electioneering to push up government spending in 2018, and believe the risk of the budget deficit being monetised will increase. This would be negative for the naira. We also think there is limited upside for the external sector in 2018, and by implication the naira, for two reasons: we see the oil price moving sideways at $50/bl; and think oil output is close to its short-term peak of 2.0-2.1Mbd.
The report authored by Yvonne Mhango, “the Naira is inclined to strengthen in the short term, judging by its fundamentals-based FX model (as it has on the NAFEX since its introduction in April at c. NGN380/$1 vs NGN360/$1). “
This was attributed this to an improving external position and the tightening of monetary policy. The current account (CA) surplus was restored in 4Q16, after being in deficit since 4Q14 (except for 1Q16), helped by a one-third fall in imports and pick-up in the oil price.
“In 2017, we project a CA surplus of c. 2.3% of GDP, owing to higher oil output, vs 0.7% in 2016E. We do not expect imports to bounce back – and temper the CA recovery – as the consumer is fundamentally weak. The stronger external position is also reflected in FX reserves recovery to 12 months of import cover (12-month MA) vs seven a year ago, by our estimates.
“Tighter Naira liquidity – indicated by YoY M2 growth falling to 0.1% in July vs 22% a year earlier, has also given the currency support.
“We expect the naira to strengthen as we approach year-end. Accordingly, we revise our YE17 FX rate forecast to NGN332/$1 vs NGN447/$1 previously.”

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