Highlights on why CBN may devalue Naira 2020 – Analysts
Source: Daily Independent
Devaluation of Naira -The Central Bank of Nigeria (CBN) in the second half of the year, 2020, may thinker with the idea of devaluing the naira between 5 and 10 percent, a report has stated.
The report, ‘The CBN’s Gamble,’ coordinated by Mohammed Abu Basha, Director – Head of Macroeconomic Analysis – EFG Hermes, focused on steps the apex bank may likely take to cushion the effect of steps taken so far to aid economic growth.
The report focused on some of CBN’s recent policies, especially its decision to stop OMO sales to local investors as well as its imposition of loan to deposit ratio of 65 percent on Nigerian banks. The report suggests these policies are piling pressure on Nigeria’s external reserves, which dropped to a two-year low of $38 billion at the end of 2019.
“When connecting the dots and considering this seeming shift in the CBN’s policy priorities, one can only start to ask whether the CBN is indeed willing to rock the naira’s boat slightly in order to keep it sailing; i.e. push for some currency weakness to get growth going; we reckon a 5-10 percent move in 2H20 in case it happens,” it stated.
It added that, while this line of analysis clearly points to naira weakness sooner rather than later if these policies are sustained, one wonders whether the CBN is really willing to push for a self-driven devaluation that it can avoid for now, considering the bank has defended the currency for years and still has enough reserves to shore it up.
“A self-driven devaluation would be clearly a precedent in Frontier markets, as usually central banks are forced to devalue rather than seek it. We also note that such a move is coming at a time when inflationary pressure has been building up – thanks mainly to the border closure – and is set to gain more pace following VAT implementation. So, is the CBN willing to add further inflationary pressure by devaluing the naira?”
The report highlighted two scenarios for the year. It stated that the first is that 2020 could indeed be the year when the naira finally weakens with the CBN taking a positive step by devaluing the currency to enable the economy to effectively grow. “This scenario could create some short-term uncertainty, but is a positive one in the medium and long terms as it finally provides room for the economy to grow (although we argue that a devaluation alone is not sufficient to turnaround Nigeria’s economic fortune).
The second scenario, according to the report, “Would be what we know best about the CBN: it acts at the 11th hour and pulls back the liquidity breaks by re-tightening monetary policy to maintain foreign exchange stability. This is what the bank did back in mid-2018 once the external monetary environment tightened.
“We think the 50/50 chance between these two scenarios is still a significant development, as until a few months ago we would have assigned a near 0% probability for devaluation in the short term. We will be keeping a close eye on:
i) next MPC meeting;
ii) foreign reserves;
iii) Naira’s parallel rate; and
iv) OMO issuances, to determine which scenario is the most likely”.
On the stability in the foreign exchange market, the report stressed that this has “for long been the overarching target for the monetary policy, leading the CBN to tighten its monetary policy, mainly by reducing money supply in the system, to shield the currency from pressure”.
Adding that, “The shift in recent months towards a much more accommodative monetary policy through a number of regulatory changes, most importantly LDR floor and restrictions on OMO purchases, means that credit has expanded robustly and so has money supply.
“The move in itself is not surprising, considering the immense pressure on authorities to stimulate a stalling economy. The surprising part though is the pace of the push for stronger credit impulse and liquidity growth given this path in the Nigerian context leads only to one destination, namely naira weakness. Liquidity will look for avenues to realise returns, increasing inflation and pressuring the currency”, it stated.
IMF Lowers Nigeria’s 2020 Growth Forecast To 2.5% Meanwhile, from an earlier projection of 2.6 percent growth for 2020 in October 2019, the International Monetary Fund (IMF) on Monday lowered its growth forecast for the Nigerian economy in 2020 and 2021 to 2.5 percent.
This was contained in the World Economic Outlook: January 2020 released by the IMF on Monday, titled ‘Tentative Stabilisation, Sluggish Recovery?’ The report, however, indicated that global growth will endure sluggish growth as it is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021—a downward revision of 0.1 percentage point for 2019 and 2020 and 0.2 for 2021 compared to those in the October World Economic Outlook (WEO).
“The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years. In a few cases, this reassessment also reflects the impact of increased social unrest. “On the positive side, market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favourable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment that had set in at the time of the October WEO.
However, few signs of turning points are yet visible in global macroeconomic data. “While the baseline growth projection is weaker, developments since the fall of 2019 point to a set of risks to global activity that is less tilted to the downside compared to the October 2019 WEO. These early signs of stabilisation could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending.
Additional support could come from fading idiosyncratic drags in key emerging markets coupled with the effects of monetary easing”, the report stated. Downside risks, however, remain prominent, including rising geopolitical tensions, notably between the United States and Iran, intensifying social unrest, further worsening of relations between the United States and its trading partners, and deepening economic frictions between other countries.
A materialisation of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline. Significantly, analysts at United Capital had two weeks ago said the 2020 outlook for the Nigerian economy hangs on a framework of a well-intended but slightly uncoordinated policy outline.
They said the, “GDP growth is expected to sustain a gradual uptick in 2020, anticipated to expand above 2.3 percent, faster than 2019 but below 3.0 percent”. It added that “inflationary pressure will persist due to supply shortages and the shutdown of the border, given the direct impact on food prices. Again, increased money supply by the CBN may keep the core inflation sub-index elevated due to pressure on foreign exchange. In sub-Saharan Africa, the IMF said the “growth is expected to strengthen to 3.5 percent in 2020–21 (from 3.3 percent in 2019).
The projection is 0.1 percentage point lower than in the October WEO for 2020 and 0.2 percentage point weaker for 2021”. This reflects downward revisions for South Africa, where structural constraints and deteriorating public finances are holding back business confidence and private investment and for Ethiopia, where public sector consolidation, needed to contain debt vulnerabilities, is expected to weigh on growth. For the emerging market and developing economy group, growth is expected to increase to 4.4 percent in 2020 and 4.6 percent in 2021 (0.2 percentage point lower for both years than in the October WEO) from an estimated 3.7 percent in 2019.
The growth profile for the group reflects a combination of projected recovery from deep downturns for stressed and underperforming emerging market economies and an ongoing structural slowdown in China.
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