Wednesday, December 8

Despite increased foreign reserves, naira will depreciate further in 2022 – Fitch report


Despite the upsurge of foreign reserves, the Naira is projected to further depreciate in 2022.

This is according to projections in the Nigeria Country Risk report by Fitch Solutions.

Fitch expects that while the CBN continues to intervene to support the naira exchange rate, the agency expects that the naira would weaken only slightly from a spot rate of NGN412.75/USD to NGN416.00/USD by the end of 2021.

What Fitch Solutions is saying

The report said, “The naira will weaken further – to an average of NGN428.00/USD – in 2022 as dollar demand continues to rise on the back of the strengthening economic recovery.

However, we expect Nigeria’s international reserves to continue to improve in the coming quarters, thus bolstering the CBN’s ability to manage the pace of currency depreciation.

At Fitch Solutions, we expect that the Central Bank of Nigeria (CBN) will seek to maintain the current value of the managed naira exchange rate until the end of 2021, after it implemented a devaluation in May 2021 that saw the currency fall from NGN380.00/USD on May 11 to NGN408.16/ USD on May 12.

The devaluation involved the adoption of the weaker exchange rate for investors and exporters (known as the Nafex) as the new official rate. Since then, the naira has fallen slightly to a spot of NGN412.75/USD, weakening by a total of 8.4% in the year to date.

While we previously expected that the CBN would implement a substantial further devaluation to NGN437.10/USD by the end of 2021, we now forecast that the currency will depreciate moderately to NGN416.00/USD. The revision reflects our expectation of a significant improvement in Nigeria’s foreign reserves in the coming months. Weakening reserves have in the past pointed to imminent devaluations by the CBN.”

What you should know

  • According to the report, Reserves rapidly declined from USD36.4 billion in January to USD33.3 billion in July, owing to steadily rising imports (due to the slow economic recovery) and weak oil output (88.7% of export earnings in 2020).
  • However, the IMF approved a new allotment of Special Drawing Rights (SDRs) in late August, with Nigeria receiving USD3.4 billion (SDRs are special reserve assets issued by the IMF and pegged to a basket of major currencies; they are held at central banks as reserves).
  • In late September, Nigeria issued a USD4.0 billion eurobond. International reserves are expected to rise rapidly in September as a result of this and the SDR allocation, and we have revised up our year-end prediction from 4.1 months of import cover to 5.1 months (or USD41.6 billion), bolstering the CBN’s ability to sustain the naira in the short term.
  • The gross external reserves stood at US$41.41 billion as at November 18, 2021, compared with US$41.34 billion in October 2021, a moderate increase of 0.17%, indicative of a stable bullish pace.



nairametrics.com

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