Analysts forsee medium term naira instability as pressure on recurrent expenditure resurfaces

The ability to maintain the long-term stability of the naira has begun to stir concerns of investors who have expressed worry over the state of the country’s foreign exchange rate and reserves for the near term.

According to analysts at United Capital the anticipated pressure on recurrent spending, following the recent approval of the minimum wage bill, may have led to its collapsing the official rate from N305.5/$1 to N360.0/$1.

“This may be a strategic move by the government to rebalance its revenue/expenditure profile in the medium term, the analysts envisaged.

While the decision of the authorities on the rate collapse remain unclear, the analysts said they “maintain a view that the outlook for the naira is stable in the near term but not in the medium term.” they stated.

Although data from the Central Bank of Nigeria (CBN) indicates that the currency market was mostly stable in the first half of 2019, this has been largely on account of the CBN staying committed to defending the naira via frequent wholesale and retail FX intervention.

Notably, the external reserves improved 4.5% YTD in H1-19, driven by unexpected uptick in oil prices and foreign portfolio inflows.

Yet, the stability of the naira and possibility of a near term adjustment remained the biggest issues on the mind of investors interested in Nigeria, traders at United Capital stated in a research note obtained by business a.m.

Specifically, the concern revolves around the multiple exchange rates regime where the official rate trades at a wide margin to the I&E rate. Another concern revolves around the possible harmonization & devaluation, while the final concern is tied to the complexity and transparency of the current exchange rate regime as well as the need for simplification and more clarity.

With the above in mind, United Capital research analysts were of the view that the apex bank will maintain its defense of the naira for now.