Goldman Sachs has forecasted that the naira is set to strengthen to N1,200 per dollar in the upcoming 12 months. In its report dated March 7, 2024, the renowned global investment bank also emphasized that the local currency appears undervalued when assessed against the Real Effective Exchange Rate (REER) historically.
In simpler terms, the firm explained why it believes the account surplus will increase from +3.5% to over +5.0% of GDP due to recent currency movements and reduced imports. They think the Nigerian currency, the naira, is currently undervalued and predict it will strengthen to N1,200 within the next year. However, the report pointed out that the monetary authority has not taken the necessary steps to attract the capital inflows needed to address financial challenges.
It mentioned that the country is starting to recover from a time when the monetary policies were changing a lot. This meant there wasn’t a clear plan in place and interest rates were really low, causing the local currency to lose value quickly. In the last few months, the currency has fallen a lot, around 60-70% in total over the past nine months.
Goldman Sachs mentioned that the recent change in policy, triggered by the decision of the Monetary Policy Committee (MPC) and the Central Bank of Nigeria (CBN) bill auction last week, resulted in effective interest rates increasing to 27 percent. This change is still uncertain because the new team doesn’t have a strong track record yet, and the real interest rates are now positive beforehand.
It did point out that the new policy change wasn’t as good as what Egypt has, but overall, the situation is looking up for Nigeria. With decent real rates, not too many funds coming in, and signs of a shift in policy, Nigeria seems to be heading in the right direction after the recent currency trouble.
The report said: “These developments have prompted us to shift to a constructive outlook for the naira, which our FX strategists expect to appreciate to N1,200 vs. the dollar in 12 months.
“We think the Naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 per cent of GDP in 2023 Q3, and we expect it to increase above +5.0 per cent on the recent FX moves and associated import compression. We thus see the reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months.
“In addition, we advocate for a bull-steepening of the Eurobond curve, as external liquidity concerns diminish. That said, the policy steps implemented to date are only a first step in the right direction, and we think more follow-through is required to achieve a durable macro stabilisation.”The report further observed that an incomplete monetary policy transition had undermined the Naira in recent months, adding that the most notable change to the economic policy announced by President Bola Tinubu in his inauguration speech was to the conduct of monetary policy which he described as needing a “thorough house cleaning.”