Factors that could make the exchange rate stable in 2023
The recent strengthening of Ghana’s exchange rate provides useful insights into what could happen to Nigeria’s exchange rate if the stars align.
Ghana has seen its exchange rate rally by over 25% since it announced a landmark $3 billion bailout deal with the IMF earlier in the week.
The cedis gained 15% on Thursday trading at about 9/$1 as at the last check. The performance of the currency in the last week is seen to have been boosted by news of the IMF deal which means the country gets the much-needed liquidity it needs to meet its foreign currency demands.
Ghana reported its inflation rate topped 50% for November triggering another possible interest rate hike in the short term. However, we believe the $3 billion IMF deal will help bring down the inflation rate which most Ghanaians believe has been driven by the exchange rate depreciation.
Nigeria is experiencing the same economic challenges faced by Ghana with an inflation rate of 21.47% highest in over two decades. Just like Ghaha, the inflation rate is influenced by the massive currency depreciations experienced on the black market.
Nigeria’s exchange rate between its naira and the dollar depreciated to as high as N850/$1 earlier in November, and at some point, analysts feared it could drop to as low as N1000/$1 by year-end.
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Since then, the exchange rate appears to have settled at an anchor price of around N750/$1 suggesting the volatility experienced in the last three months has reduced.
Ghana’s exchange rate experience influenced by news of the IMF deal portends an important lesson for currency speculators in Nigeria.
The exchange rate between the naira and the dollar can strengthen in a matter of days just over a policy change or Nigeria cuts a major deal for a concessionary loan.
Nairametrics also believes there are a number of actions that could deliver a stronger naira in the short to medium term just the way the cedis has strengthened.
Interest rate cooling: A possible cooling of an interest rate hike by the US FED early next year is also a likely boost for Ghana and other emerging markets like Nigeria.
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The US Fed earlier in the week voted to raise their interest rates by half a percentage point.
But the recent drop in the country’s inflation rate suggests the FED might start rolling back some of its interest rate hikes.
If this happens, Nigeria is likely to benefit from this as most of the portfolio outflows experienced over the last two years might reverse course.
Eurobond: Increasing Nigeria’s Eurobond borrowing will be net positive for Nigeria’s external reserves and by extension the exchange rate.
However, a recent comment by the minister of finance Zainab Ahmed, that Nigeria will not be accessing the Eurobond market due to rising yields suggests we won’t see Eurobond borrowing next year.
But she mentioned, the country will be targeting concessionary loans from the likes of the World Bank which still adds to Nigeria’s external reserve holding.
Nigeria plans to raise N1.7 trillion in foreign loans in 2023 and will use it to part finance its budget deficit. Using the official exchange rate, this is around $3.8 billion.
Oil Exports and Price: Nigeria reportedly produced about 1.5 million barrels per day last month, a major boost for the country’s foreign currency earnings.
The minister of finance also stated she anticipates 1.6 million barrels per day in increased oil production by the first quarter of 2023.
Crude oil prices are also expected to top $100 next year based on several global analyst reports tracked by Nairametrics.
The combination of oil prices and increased crude oil production is a major booster for Nigeria’s external reserves and by extension the exchange rate.
CBN Policy Reversal: Nigeria’s central bank has had its own fair share of contribution to exchange rate depreciation.
It inadvertently does this via several policy pronouncements that elicit bearish reactions from currency traders and even speculators.
The recent depreciation recorded in November was largely due to the policy on new naira notes designs. But since then, Nigerians seem to have warmed up to the announcement forcing speculators to rethink.
We expect the movement to cash-less banking transactions will be net positive for the exchange rate as it curbs the spate of currency speculations and hoarding.
A move towards a more market-friendly determination of the exchange rate and unification of rates could also augur well for the exchange rates in 2023.
Possible Emerging Market Deal: Nigeria and Ghana are not the only countries facing currency challenges in the world.
The US dollar has burned global currencies due to the US Fed’s stance on raising rates. As stated, this could change next year when it cools off rate hikes.
In addition, Nairametrics strongly believes there could be a major global deal for emerging markets and sub-Saharan African countries next year.
Our thesis is based on the need to stimulate global consumption, especially from goods manufactured in a more developed world. If emerging markets like Nigeria cannot pay for their imports, it could affect growth in developed economies,
Based on this, we will not be surprised if the G7 works on a deal that could include dollar funding lines for an emerging market like Nigeria.
Russia vs Ukraine war: We are in the 11th month of this war and things don’t seem to be ending anytime soon. However, we do not expect this war to continue deep into 2023.
A possible deal between the West and Russia is likely to occur next year which will be positive for emerging markets like Nigeria.
The war has contributed to rising inflation globally driving up commodity prices and logistics costs.
The war’s contribution to inflation also led to a rise in Nigeria’s imported inflation which is around 14%. Should the war end, this will cool global inflation and by extension Nigeria’s inflation rate.
A drop in the inflation rate helps boost exchange rate stability in the medium to long term, not just in Nigeria but globally.
In a nutshell: The current exchange rate is not fully reflective of the value of the naira in the short to medium term. There are external and internal factors that could influence it positively or even make it worse. Tracking these factors is critical to gauging Nigeria’s exchange rate stability.
Curated from: https://nairametrics.com/2022/12/16/factors-that-could-make-the-exchange-rate-stable-in-2023/
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