FX suspension to BDCs will keep Dollar above N500 —Analysts
By Kayode Tokede
A group of analysts at Vetiva Capital have disclosed that the discontinuation of foreign currencies (FX) sales to bureau de change (BDCs) operators is expected to keep the exchange rate in the parallel market above N500.
They noted that a couple of Sub-Saharan Africa economies are embracing the Central Bank Digital Currency (CBDC) initiative.
The exchange rate of N500 to a dollar has been a psychological resistance level in the parallel market where the Central Bank of Nigeria (CBN) rolls in several policy measures to check further depreciation, giving speculators a run for their money, Vetiva said.
Amidst allegations of various infractions, including speculation and money laundering, Nigeria’s Central Bank ends dollar sales to BDCs operators in July 2021. However, the CBN re-channel sales of foreign currencies to local banks as a way to curb speculation.
Though, some analysts believe that there exists a round-tripping issue among Nigerian banks that are currently operating a tight margin due to the low-interest environment engineered by the monetary policy authority to drive credits to the real sector of the economy.
Apparently curious Vetiva analysts asked, ‘Are we set for CBDCs?’ while noting that African central banks are increasingly buying into the initiative.
The investment firm said while South Africa launched a wholesale CBDC trial earlier in the year, Nigeria and Ghana are set to roll out theirs within the next two months. As opposed to the fluctuations associated with private digital currencies, such as Bitcoin, a CBDC could serve as a store of value, analysts added.
The apex bank announced October 1st as the launch date of its CBDC, the “e-Naira,” and analysts said all eyes are on the numerous benefits of the digital currency. At the just-concluded monetary policy committee meeting, the CBN Governor stated that individuals could convert naira balances from their accounts to their digital wallets.
“While this could improve efficiency in our payments system, this could also help foster the apex bank’s financial inclusion goals,” Vetiva explained. However, analysts added that low internet penetration remains a possible barrier to wider adoption.
“Concerning fiat currencies in Sub-Saharan Africa, we see COVID-19 incidences and political risks in Kenya and South Africa contributing to weaker currencies within the current quarter.”
In the review, Vetiva analysts said while municipal elections in South Africa could be priced into the Rand, pre-election risks in Kenya could cause some weakness in the Shilling.
In Nigeria, Vetiva Capital analysts said they see the Eurobond issuance and increased SDR allocation as triggers for external reserves in the remaining part of the year.
The investment firm’s base case scenario posits that the country could explore the SDR option to boost external reserves before the end of the year, informing our 2021-year end reserve stock expectation of $36.0 billion.
Should the government successfully raise $6 billion from the Eurobond market and take advantage of increased SDR allocation, Vetiva estimates that Nigeria’s external reserves could rise to $43.1 billion by the end of the year.
It added that while accretion in reserves would be positive for the NAFEX, analysts still expect the Naira to remain above N400/$ in the Investors and Exporters window unless the firm’s bull case scenario plays out.
Vetiva’s bull case scenario expected Brent price to average $66 per barrel for the third quarter of the year in addition to imports restriction and strong crude sales, relaxation of BDCs ban and $6 billion Eurobond inflow.
In the latter part of the year, analysts established a bull case scenario where Brent would print at $68 per barrel, imports restriction, and strong oil sales recovery, in addition, foreign currency raise from Eurobond and Special Drawing Rights totalled $9.4 billion.
“In the parallel market, we expect the discontinuation of FX sales to BDCs to keep the parallel market above N500/$, despite the rerouting of FX sales through banks. This is because the current arrangement phases out other users of FX. Irrespective of the external inflows into the economy, the Naira could remain under weather in the parallel market.”
However, analysts said the factor in an alternative BDC arrangement or relaxation of the BDCs ban in the fourth quarter of 2021 is a possible lever for the Naira.
“While our scenario analysis reveals that the Dollar could weaken to as high as N563 to a dollar if there are no alternatives under our bear case scenario, an early policy reversal/alternative arrangement could springboard the Dollar to N482 to a Dollar”
But, analysts at Vetiva Capital said in the foreign currency report that they anticipate a possible appreciation to N506 per Dollar by the end of the year.
