Morgan Stanley, one of the leading global investment bank, has forecasted that Nigeria’s currency – the Naira – will appreciate at the parallel market rate in the near term.
The bank, which gave this projection in its publication titled “Nigeria Sovereign Credit Strategy “No Longer Pumped”, stated that as more flows would be redirected through formal banking channels, the Naira will appreciate in the near term, leading to a convergence between the Investors and Exporters (I&E) rate and the parallel market rate.
Prior to the foreign exchange (FX) policy directive to the Deposit Money Banks (DMBs) and FX dealers by the Central Bank of Nigeria (CBN) on Wednesday, the parallel market rate stood at N759 to the US dollar.
Currently, the one-month non-deliverable forward (NDF) contract is trading at N738 against the spot rate of N664, suggesting that the clearing level will be higher than the current spot level.
In its latest report, the investment bank noted that while it was not easy to predict the exact settling point for a managed currency like the Naira, predicted that the local currency would appreciate at the parallel market as more flows go into the market through formal channels.
The bank’s experts foresee that convergence between the I&E window rate and the parallel market will likely be lower than the current unofficial level but higher than the current spot rate.
They clarified: “Prior to Wednesday’s FX adjustment, the parallel market rate was at 759, suggesting that this is where the currency ought to be trading in the interbank market. The 1m NDF is currently trading at 738 versus spot of 664, suggesting that the clearing level will be higher than the current spot level.”
“While it’s difficult to be scientific about where the currency will truly settle for what has been a managed currency like the naira, we do expect that the unit will appreciate in the parallel market in the near term as more flows get redirected through the formal banking channels. Consequently, the convergence level between the I&E rate and the parallel market should be somewhere lower than the current unofficial level but higher than the current spot rate”, the bankers added.
Morgan Stanley attributed the recent appreciation of the local currency at the FX markets to positive policy shocks and successive reforms, especially the recent removal of fuel subsidies and the unified FX rate announced by the monetary authorities on Wednesday.
The leading investment bank also indicated that the impact of the currency adjustment on inflation would be limited, as most goods have already adjusted to the parallel market rate.
Meanwhile, another frontline global bank, Goldman Sachs has welcomed Nigeria’s new foreign exchange rate regime, which it views as positive surprises, supporting a constructive view on Nigeria’s sovereign credit.
It, however, believes that any FX liberalization or easing of restrictions would require higher local interest rates to mitigate the depreciative pressure on the Naira.
