Naira to depreciate further on back of dollar supply shortage
The naira is expected to depreciate further this week on the back of continued shortage of dollar supply in the foreign exchange (FX) market.
Analysts at Cowry Asset Management Limited expect the Central Bank of Nigeria (CBN) to close the FX market at the end of the week, as has been the tradition to close the market in the third week of December.
According to analysts at Afrinvest Securities Limited, FX illiquidity has been a major issue currently facing individuals and businesses in Nigeria, as the CBN kept its FX policy on a tight leash.
Consequently, official exchange rate has remained within the range of N196.97/$ and N197/$ since July 21, 2015, till date. After opening at N197/$ on Monday, the official exchange rate depreciated 3kobo on Tuesday to settle at N196.97/$ and stayed at the same rate till the end of the week.
Also, interbank market rate opened at N199.10/$ on Monday and equally declined 3kobo on Tuesday to stay at the same rate till the end of last week.
On the back of refusal of some BDC operators to render returns to the CBN, a number of BDCs were excluded from this week’s intervention. As a result, the spread between the parallel market rate and the interbank widened further on Thursday to close at a high of N257/$. Thus representing a N5 depreciation from the N252/$ recorded on Wednesday.
In a related development, the Nigerian external reserves slipped to a 5-month low of $29.6 billion during the week. Meanwhile, oil price outlook remains bleak with Brent crude falling below $40p/b this week following OPEC’s decision to defend its market share last Friday.
“We maintain that devaluation remains imminent,” Ayodeji Ebo, head, investment research, and his team of analysts said.
At the fixed income market, activities in the Nigerian bond market were predominantly bullish last week as a general drop in yields was noticed across tenors. To start off the week, there was a general rise in price of all bond instruments save for the AUG 2016 bond whose price fell 1kobo on Monday. Thus, after closing at 10.1 percent on Friday, average yields dropped 46bps on Monday to 9.6 percent. While performance was mixed on Tuesday and Wednesday, average yields moderated further on both days to close at 9.4 percent on Wednesday.
Nevertheless, longer-tenored instruments from the JAN 2022 to JULY 2034 bonds suffered price depreciations with the NOV 2028 bond declining the most, down 76 kobo to N125.86.
The Debt Management Office (DMO) re-opened the FEB 2020 and MAR 2024 instruments at an aggregate offer of N50 billion on Wednesday. The result from the auction however indicated that N86.8 billion was subscribed for from the N30 billion available offers for the FEB 2020, while N59 billion was subscribed for from the N20 billion available for the MAR 2024. Quoted rates ranged between 9 percent and 15.5 percent for the FEB 2020 instrument, which was allotted at a marginal rate of 10.95 percent.
“We believe the level of participation in the last bond auction for the year was driven by the high liquidity in the market given that the amount subscribed were only 34.6 percent and 33.9 percent of amount allotted for the FEB 2020 and MAR 2024, respectively. However, at 9.3 percent, average yields fell 0.8 percent W-o-W. In the coming week, we expect yields to trend within the same range,” analysts at Afrinvest said.
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