17 September 2018

Nigeria: Expert Pegs Nigeria's Foreign Exchange Rate At N395/$1 in 2019

Expert at Renaissance Capital has opined that the naira will have to weaken in 2019 to keep it from becoming (too) overvalued predicting that the foreign exchange rate would be N395/$1 in 2019 as against the N360/$1 currently.

In a report titled: "Sub-Saharan Africa: Macro review: How do our countries stack up?" Economist at Renaissance Capital , Yvonne Mhango also predicted that there will no longer a rate cut in 2018, owing to emerging inflationary pressures, in part due to an expansionary 2018 budget.

According to the expert, "Nigeria's is the only inflation rate among the Sub-Saharan Africa (SSA) countries under our coverage that is above 10 per cent, where we see it remaining over the medium term. We now expect the policy rate to be held at 14.0 per cent until 2019. We see upside risk to this view."

The naira, the expert added, is no longer particularly cheap; "in August 2017 it swung from being over- to undervalued, on this analyst's real effective exchange rate (REER) model, when the interbank FX rate was adjusted (from N315/$1 to N360/$1) to converge with the NAFEX rate. Our fair value estimate is now N346/$1 (vs N322/$1 in 2Q18), implying the naira is only five per cent undervalued (vs 12 per cent)."

Renaissance Capital pointed out that Nigeria's year-on-year (YoY) growth in the first half of 2018 came in weaker, at 1.7 per cent, than its expectation of 2.5 per cent, due to a slowdown in crop production, a weak consumer and a decline in oil & gas's production.

"Although the non-oil sector's growth continued to improve, driven by telcos and construction in 2Q18, the biggest sectors are not participating in this recovery, including agriculture, trade and manufacturing. This explains the revision in our growth forecasts to 2.0 per cent and 2.5 per cent in 2018 and 2019, respectively, from 2.9 per cent and 3.0 per cent previously.

On the performance of Sub-Saharan Africa countries year-to-date (YtD), Mhango said the Nigerian economy under delivered, adding that growth came in weaker than we expected.

The expert added: "The one Sub-Saharan African country whose macro has surprised us to the upside is Kenya. Its growth recovery was swifter than we expected, and the overvalued shilling defied gravity. However, energy price pressures are beginning to emerge. The Nigerian economy under delivered; growth came in weaker than we expected, and the Monetary Policy Committee (MPC) chatter has swung from rate cuts to hikes.

"Added to that the naira is no longer cheap, of the smaller economies, Rwanda's growth recovery has been sharper than we expected, while Zambia disappointed with sluggish growth and fiscal slippages. We are now more constructive on Kenya, we like Rwanda, are neutral on Ghana and Tanzania, and cautious on Nigeria and Zambia."

As for Kenya Mhango said the recovery from 2017's headwinds was stronger than they expected.

"Growth rates above five per cent returned more swiftly than we predicted. YoY growth accelerated to 5.3 per cent in 4Q17 and 5.7 per cent in 1Q18. We were most surprised by the non-oil economy's strong performance despite low, single-digit credit growth. This suggests the National Assembly's vote, in August, not to repeal the rate cap bill may not be as negative for growth as we had feared. (President Uhuru Kenyatta has yet to sign the draft legislation that retains the rate cap.) We are now forecasting growth of 5.4 per cent for 2018 (vs 4.6 per cent in early 2018). The Kenyan shilling (KES) - which is overvalued, by our estimates - has strengthened vs the dollar YtD, on the back of inflows of euro bond proceeds, strong remittances and locals capitalising on a tax amnesty on foreign-held assets. While we foresee a KES depreciation, we expect it to be well managed.

"Given the shilling's resilience, we revise our FX forecast to KES105/$1 at YE19, vs KES110/$1 previously. The one risk to flag is emerging energy price pressures, which pushed up non-food inflation to a six-year high of 8.6 per cent YoY in August. Given the 16 per cent Valued Added Tax (VAT) on petroleum products implemented on 1 September (yet to be signed into law by President Kenyatta), we see a real risk that inflation may breach the upper band of the 2.5-7.5 per cent target. We therefore no longer expect a rate cut, from 9.0 per cent, in September," Mhango stated.

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