Naira May be Devalued Again – RenCap Analysts

Analysts at Renaissance Capital Limited (RenCap) have predicted that the likelihood of easing the monetary policy this year is slim because there might be a further devaluation in Naira in order to reflect the $4.5 billion fall in Nigeria’s forex reserves.

In a report titled: “Nigeria beyond 29 May: Managing expectations, RenCap said “The central bank is likely to move back toward a managed float versus the managed peg of recent months.

“A weaker naira implies a build-up of inflationary pressures. We see inflation breaching the central bank’s inflation target band of six to nine per cent and entering double-digits in the third quarter of 2015.

“This rules out any prospect of monetary easing in 2015, in our view. The devaluation may be smaller than the market projects (10- 15%), because authorities seem to be focused on medium-term fundamentals, which they expect will turn in favour of the naira, primarily through a fall in import demand – particularly of agriculture products (via continued improvement in production) and fuel imports (due to 650kb/d of fuel coming on stream from Dangote’s refinery), which account for 60 per cent of forex usage.”

The report added that “The APC comes in with a macro policy that requires a much weaker naira, i.e, an export-led growth policy. Nigeria is experiencing a great wave of expectation ahead of Muhammadu Buhari’s 29 May inauguration. Given that the incoming administration will be substantially resource-constrained, we think Buhari’s biggest challenge will be managing expectations.

“For the first time since the 2008/09 global financial crisis, the outgoing administration has approached development finance institutions (DFIs) for loans to help bridge its $4 billion financing gap; it approached the World Bank and African Development Bank for $1billion each.

“As we expect the financing gap to be at least double the full year 2015 target of 1.1 per cent of GDP, due to optimistic revenue assumptions and slower growth, we believe the incoming administration is apt to seek larger loans from the DFIs.”