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Nigeria’s N506.72bn half-year trade surplus to boost naira stability

by Editor

September 14, 2017 | 2:30 am
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Nigeria recorded a trade surplus of N506.72 billion for the first six months of the year, latest figures from the National Bureau of Statistics (NBS) have shown. This means that the country exported more goods than it imported within the period, which is positive.

The NBS figures show that the country’s total import rose by 13.51 percent to N2.6 trillion in the second quarter of 2017 and was 9.97 percent higher than the comparable period of 2016.

However, export rose 3.2 per cent to N3.1 trillion from the first quarter 2017 but was significantly higher by 73.48 percent, when compared to the same period of 2016. The country’s total trade for the period stood at N5.7 trillion.

Even though the trade surplus recorded in the second quarter at N506.5 billion was less than N719.4 billion recorded the first quarter of 2017, it was a complete turnaround from the N572.12 billion trade deficit in the same period of last year.

The higher exports when compared to imports, resulted in the trade surplus for the country, which has the potential boosting the country’s external reserves and strengthening the naira.

Already, Investment banking firm Renaissance Capital says that the naira, at a current exchange rate of N360 to the US$, is “undervalued” and is forecasting that it would appreciate to as high as N332 to the US$ by the end of the year.

“The naira, at the adjusted interbank FX rate of NGN360/US$, is undervalued, according to our FX models. We think a stronger external sector and tighter monetary policy imply naira appreciation risk in the near term, and as such, we revise our year end foreign exchange rate forecast to NGN332 to the US$ as against N447 to the US$1 previously, Renaissance Capital stated in a investment note made available to BusinessDay.

Explaining why the believes the naira will close at N332 by the end of the year, the investment firm cited “an improving external position and the tightening of monetary policy.”

The investment firm noted that the “The current account (CA) surplus was restored in fourth quarter of 16, after being in deficit since the fourth quarter of (except for first quarter of 2016), helped by a one-third fall in imports and pick-up in the oil price.”

Rencap forecast that in 2017, the country will have a current account surplus of approximately 2.3 percent of GDP, owing to higher oil output,.

“We do not expect imports to bounce back, and temper the current recovery, as the consumer is fundamentally weak. The stronger external position is also reflected in foreign exchange reserves recovery to 12 months of import cover, as against seven, a year ago.”

They also noted that tighter naira liquidity – indicated by yearly broad money growth falling to 0.1 percent in July when compared to 22 percent a year earlier, has also given the naira support.

The investment firm was however bearish on the long-term strength of the naira.

“In 2018, when we assume accommodative policy, and that oil output and price move downwards, we expect the naira to trend weaker. We forecast an foreign exchange rate of N373 to the US$ at the end of 2018”.

The investment firm states that their foreign exchange model predicts an exchange rate of NGN373 to the US$ at end of 2018, “assuming monetary policy becomes accommodative and little upside for the external sector.

“We think it is probable that instead of appreciating in the near term, the naira weakens gradually to NGN373 to the US$ at end of 2018, which would signal price stability.”

The analysts at Rencap say they believe the Central Bank of Nigeria tightening of naira liquidity is paving the way towards an interest rate cut in future. They forecast that the apex bank would cut rates to 13 percent by the end of 2017.

“We think a rate cut is more likely in November, than at the 26 September meeting, in part because inflation remains elevated. We think another 1-2 percentage points is likely in 2018. We expect electioneering to push up government spending in 2018, and believe the risk of the budget deficit being monetised will increase. This would be negative for the naira. We also think there is limited upside for the external sector in 2018, and by implication the naira, for two reasons: we see the oil price moving sideways at $50 per barrel; and think oil output is close to its short-term peak of 2.0-2.1Mbd.”

Peace in the Niger Delta has helped boost oil production and dollar earnings helping support the Central Bank’s interventions in the foreign exchange market.

Latest OPEC data shows, the country’s crude oil output hit 1.86 million barrels per day (mbpd) in August from 1.72m bpd in July.

“The Nigerian production figures underline the improvement in the current account balance that we expect to continue over the course of this year” analysts at Standard Bank stated in an investment note yesterday.

With the Central Bank’s continuous liquidity mop up and limited capital spending on the part of the Federal Government, import demand will be restrained this year, bolstering the improvement in the trade balance as a result of reduced pressure on the naira, analysts say.

But not all analysts are optimistic about future naira strength. Bank of America Corp. said last month the naira needs to weaken 20 percent to about N450, from its current exchange rate of N360, before it reaches fair value. Goldman Sachs Group Inc. and Citigroup Inc. both say depreciation to about N400 could be what it takes before investors buy enough naira assets to end Nigeria’s dollar shortages, according to a report by Bloomberg.

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by Editor

September 14, 2017 | 2:30 am
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