Analysts at Renaissance Capital have forecast a weaker naira for year-end 2018 on presumed accommodative policies prior to the February 2019 elections.
In a review of their foreign exchange forecasts for Sub-Saharan Africa in the last eight months of the year published Monday, the analysts noted that they assume an accommodate monetary policy ahead the 2019 elections in 2018, which would make the local currency trade N373 to the dollar in 2018.
“We assume accommodative policy in 2018, ahead of the February 2019 elections and expect the NGN to trend weaker to NGN373/$1 at YE18. That said, we think the naira will become less cheap, in real terms, in the short term,” they said.
“We think a stronger external sector and tighter monetary policy imply NGN appreciation risk in the near term (we revised our YE17 forecast to NGN332/$1 in our 11 September note, Nigeria: The naira – Short-term strength, weaker in 2018),” they added.
They equally stated that the Nigerian naira in eight months to August was among the worst performers in sub-Saharan Africa, including the Congolese franc (CDF), the Malawi kwacha (MWK), while The Kenyan shilling (KES) was seen remarkably stable despite the politics.
The naira’s underperformance, according to them is due to the adjustment of the interbank FX rate to NGN360/$1, from NGN315/$1 previously in early August.
They said their opinions rely on real effective exchange rates (REER), which help gauge how a currency stacks up against a trade-weighted basket of currencies, explaining that it is based on purchasing power parity theory, and the idea a currency adjusts to its fair value in the long run.
“The best-performing currencies in 8M17, in our coverage universe, were the Mozambican metical (MZN), the Egyptian pound (EGP) and the Zambian kwacha (ZMW).
“In September, the ZMW reversed most of its gains, so we are revising our forecast weaker. The worst performers were the Congolese franc (CDF), Malawi kwacha (MWK) and Nigerian naira (NGN),” they said