Goldman Sachs analysts Andrew Matheny and Bojosi Morule have projected a significant turnaround for Nigeria’s currency, foreseeing a remarkable appreciation to N1,200 against the US dollar within the span of 12 months.
This optimistic forecast marks a monumental shift from the prevailing narrative of the naira’s undervaluation, promising a substantial recovery for the embattled currency.
The crux of this forecast rests on Nigeria’s transition away from volatile monetary policies and deeply negative real interest rates, factors that have contributed to the naira’s prolonged depreciation. According to the analysts, the past nine months have witnessed a staggering 60-70% cumulative weakening of the naira, signaling the urgency for a strategic intervention to reverse this trend.
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However, amidst this gloomy backdrop, there emerges a glimmer of hope. The analysts assert that the trajectory of Nigeria’s currency crisis is poised for a pivotal transformation, propelled by the emergence of positive real interest rates and a shift towards more orthodox policy frameworks.
This transition, they note, marks the inception of Nigeria’s journey towards economic recovery, albeit with the caveat of sustained and concerted efforts for enduring macroeconomic stability.
Yet, amidst the optimism, lurks the specter of uncertainty. The success of Goldman Sachs’ forecast hinges on the unwavering commitment of Nigerian authorities to uphold orthodox monetary policies and enact stringent measures to attract vital capital inflows. Any deviation from this trajectory could pose a formidable risk to the projected appreciation of the naira.
The recent monetary policy reforms under President Bola Tinubu’s administration have garnered commendation from Goldman Sachs analysts, who view the adoption of inflation targeting and a more flexible exchange rate regime as positive strides toward economic rejuvenation. However, the initial implementation phase of these reforms was marred by criticisms of inadequate depth, underscoring the imperative for a steadfast execution of policy adjustments.
In their report, the analysts highlight the indispensable role of positive real interest rates and external financing in mitigating Nigeria’s currency and liquidity crisis. While acknowledging recent policy adjustments and bill issuances by the central bank as steps in the right direction, they emphasize the exigency for more decisive rate increases and a resolute confirmation of policy shifts to galvanize meaningful foreign inflows.
Addressing skepticism surrounding their forecast, the analysts assert that Nigeria’s currency and external liquidity crisis necessitate immediate remedial measures, including the attainment of positive real interest rates and capital inflows. They posit that the current undervaluation of the naira, coupled with a burgeoning current account surplus, lays a robust foundation for the projected appreciation to N1,200/$ within the ensuing 12 months.
The report reads partly:
“We argued that addressing Nigeria’s currency and external liquidity crisis required positive real interest rates and capital inflows, conditions that were both present – at least in a limited form – for the first time last week on the back of the central bank’s monetary policy adjustments and bill issuance.
“In our view, this is the cue to turn constructive on the FX outlook, even if more decisive rate increases and confirmation of the policy shift are likely required to attract meaningful foreign inflows. This is especially the case given that, in the near term, inflation on our estimates is likely to rise further on the back of lagged currency depreciation and given that real interest rates are still comparatively low relative to elsewhere (most notably Egypt, which is likely to be a beneficiary of large inflows on the back of recent policy adjustments).
“We think the Naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5% of GDP in 2023Q3, and we expect it to increase above +5.0% 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 1200 within the next 12 months.”
Reaction to this prediction has been skeptical, owing to several factors, including what analysts have described as ‘inadequate moves’ by the Nigerian government to boost the naira’s performance in the FX market.
Also, in June 2023, JP Morgan projected that the naira, which was at N755/$1 then, would appreciate in the coming months, trading around N600 to a dollar. A statement by the institution said: “While it will take a few days for USD/NGN spot to settle, we fully expect an initial overshoot towards the parallel market rate of -750 or higher, after which, we expect USD/NGN to settle in the high 600s over [the] coming months.”
Despite JP Morgan’s optimism for a significant naira appreciation, the currency plummeted to its lowest levels since then, exacerbating record-high inflation rates and fostering disillusionment among Nigerians.
Financial analysts believe that while Goldman Sachs’ prognosis offers a ray of hope for Nigeria’s currency outlook, its realization hinges on the meticulous execution of monetary policies and the ability of Nigerian authorities to navigate the intricate terrain of economic stabilization.