Goldman Sachs has predicted that the naira will appreciate to N1,200 per dollar within the next 12 months.
The global investment banker, which stated this in its report dated March 7, 2024, added that the local currency looked cheap on a Real Effective Exchange Rate (REER) basis in a historical context.
Further justifying its forecast, it stated that the account surplus, which stood at +3.5 percent of GDP in the third quarter (Q3) of 2023 is expected to increase above +5.0 percent on the recent FX moves and associated import compression.
“We thus see reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months,” the firm added.
The report, however, stated that monetary authority had not “tightened policy appropriately to attract the capital inflows required to ease fiscal and external financing constraints”.
It pointed out that the country is finally emerging from a period of monetary policy transition characterised by an absence of a credible policy anchor and deeply negative real interest rates, adding that this had implied a volatile and sharp depreciation of the local currency in recent months and a cumulative 60-70 percent weakening over the past nine months.
Godman Sachs noted that the policy shift that is catalysed by the Monetary Policy Committee (MPC) decision and the Central Bank of Nigeria (CBN) bill auction last week that brought effective interest rates to 27 percent remained tentative, given the new team’s limited track record and ex-ante real rates that are now positive.
It however argued that the policy shift still did not compare favourably to elsewhere, notably Egypt.
Nonetheless, it said given a combination of positive real rates, limited capital inflows, and evidence of a shift to a more orthodox policy set-up, “we think that Nigeria is turning the corner following its recent currency crisis”.
The report said: “These developments have prompted us to shift to a constructive outlook for the naira, which our FX strategists expect to appreciate to N1,200 vs. the dollar in 12 months.
“We think the Naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 percent of GDP in 2023 Q3, and we expect it to increase above +5.0 percent on the recent FX moves and associated import compression. We thus see the reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months.
“In addition, we advocate for a bull-steepening of the Eurobond curve, as external liquidity concerns diminish. That said, the policy steps implemented to date are only a first step in the right direction, and we think more follow-through is required to achieve a durable macro stabilisation.”
The report further observed that an incomplete monetary policy transition had undermined the Naira in recent months, adding that the most notable change to the economic policy announced by President Bola Tinubu in his inauguration speech was to the conduct of monetary policy which he described as needing a “thorough house cleaning.”
It said, “Following the dismissal of the previous CBN governor, who had presided during former President Buhari’s two terms in office, Tinubu appointed new leadership at the CBN in September 2023 that signalled a shift to a more orthodox policy set-up.
“While we think the new team’s communication – including guidance for a transition to inflation targeting and flexible exchange rate, greater transparency, and a more arms-length relationship with the fiscal authorities – was welcome, it was not accompanied by sufficient policy actions until last week,” the report added.
James Emejo
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