Nigeria’s exchange rate to be devalued to N550/$1, as investors ignore cheap equities

A leading global investment banking firm, Goldman Sachs Group, this week, announced that a significant devaluation of the naira is expected within the next 12 to 18 months. This is expected to help stabilize Nigeria’s external reserves.

Economists from Goldman Sachs are predicting that an exchange rate of between N500 to N550 to a dollar should help stabilize the external reserves and bring about the desired balance.

The external reserve has been on the decline since the global lockdown and crash of oil prices which were triggered by the outbreak of the coronavirus pandemic. This has put a lot of pressure on the foreign exchange market, thereby affecting the Central Bank of Nigeria (CBN)’s capacity to intervene in the market and defend the naira.

The CBN has adjusted the official exchange rate twice this year. The first one was from N307/$1 to N360/$1 and then just last week, from N360/$1 to N380/$1.

Meanwhile, Nigerian investors have shown a preference for less risky local debt market, where rates are at the lowest in a decade, over Nigerian stocks which have been showing better returns. This is due to a mix of domestic and external threats which they are wary of.

The Nigerian Stock Exchange recorded a 57% slump in its trading activities in June this year when compared the last year’s figure for the same period. The Pension Fund Managers are also not too disposed to the equities market, with just 4.9% of retirement savings account invested in the markets as against the permitted rate of 15%

According to a Bloomberg report, the head of the macro strategy at EFG Hermes Research, Simon Kitchen, said in a note to clients on August 6, that an extremely serious shortage of dollars and lack of policy reforms are keeping foreign investors on the sidelines.

He disclosed that local investors are avoiding the market due to the poor economic outlook as a result of the coronavirus pandemic and the effect of lower oil prices on Nigeria he also said that Nigerians are nervous about the instability and potential shocks from the naira exchange rate.

“Based on 12-month forward price-to-earnings estimates, Nigerian stocks are less expensive than its peers in South Africa, Kenya and members of MSCI’s frontier emerging market index. But there is more than just cheap-looking shares for investors to consider, and other markets remain more appealing.

“Low valuation multiples are no guarantee of decent medium-term returns in Nigeria, compared with Pakistan where the interest rate policy is clearer and which has a far stronger correlation between valuation and future returns.”

Ayodele Salami, Chief Investment Officer at Duet Group London, disclosed that the foreign investors are reluctant to participate in the Nigerian equity market due to their inability to repatriate funds due to foreign exchange constraints.

The multiple exchange rates in Nigeria remains a source of anxiety for foreign equity investors.


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