The report shows that as more water is channeled through conventional banking channels, the sector will experience short-term appreciation, leading to a convergence between investors and exporters ( I&E) and similar market value. Prior to the FX rate change that took place on Wednesday, the equivalent market price stood at 759 naira to the US dollar, indicating that this is the currency rate that should be traded in the banking market. Meanwhile, the one-month forward contract (NDF) is trading at N738 against the spot rate of N664, suggesting that the stoppage level will be higher than the current level. Although it is difficult to predict the exact point of stability for a regulated currency like the naira, Morgan Stanley expects the currency to appreciate in the stock market as it flows into the domestic channel. wealth. This agreement between the I&E rate and the comparable market may be lower than the current unofficial rate but higher than the current spot rate.
Morgan Stanley said that the recent appreciation of the naira is due to the favorable political climate and ongoing reforms in Nigeria. The removal of fuel subsidies and the exchange rate adjustment are important factors that boost the currency against other emerging market peers. The central government's decision to remove fuel subsidies led to price-inflicted inflation and a reduction in the balance of payments. Furthermore, the adjustment of the exchange rate, despite the challenges that may occur in the short term, should contribute to a faster economic recovery. Morgan Stanley also indicated that the impact of currency changes on inflation should be limited, since many products have already adjusted to similar market prices. However, the International Monetary Fund (IMF) said that a 15% exchange rate would have an impact of 0.93% on inflation by June 2024. With current exchange rates above this threshold, inflationary pressure can be expected.
However, Goldman Sachs welcomed the new Nigerian exchange rate. The bank sees recent political developments as a positive surprise, supporting a positive outlook for the glory of the Nigerian government. On the other hand, he expressed doubts about the true intentions of the policy and emphasized the need for high local interest rates to attract more investment and meet the high demand for foreign currency, estimated at $12 billion. The direction of Nigeria's exchange rate policy is still a major concern, as it is not known whether the monetary system will be maintained properly or whether there will be a change in the exchange rate. Goldman Sachs believes that any foreign exchange liberalization or easing of restrictions will require higher local interest rates to prevent downward pressure on the economy.
“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.”
