RenCap predicts further naira devaluation


Analysts at Renaissance Capital Limited (RenCap) have predicted a further devaluation of naira in order to reflect what they described as the $4.5 billion fall in Nigeria’s forex reserves.

They also ruled out the likelihood of easing monetary policy this year.

In addition, they pointed out that given the revenue constraint facing the country, the Buhari’s government “will continue to wind down some companies’ pioneer status, so they can start paying taxes, and reduce the number of authorities that can grant pioneer status, to slow the awarding of tax exemptions.”

Nigeria’s forex reserves stood at $29.62 billion as at May 27th. The Central Bank of Nigeria (CBN) had in February devalued the naira and also scrapped the Retail Dutch Auction System (RDAS) of the forex market.

But analysts at RenCap in a report titled: “Nigeria beyond 29 May: Managing expectations,” argued that the naira, which has essentially been pegged at N199/$1 since the mid-February devaluation, would be devalued further.

“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.”

Muhammadu Buhari will be sworn in today as Nigeria’s president. He emerged president under the All Progressive Congress (APC) and defeated the outgoing president Goodluck Jonathan in an election that took place in March this year.

“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,” the report by the investment bank added.

It noted that the oil sector was expected to be the primary focus of Buhari’s crackdown on graft; in particular, reforms related to the fuel subsidy, repatriation of oil money and refineries.

“The cabinet is likely to be announced within a month of the inauguration.

Those familiar with Buhari expect a disciplined administration. Many believe the APC’s track record in Lagos State is a good sign that it will deliver at the national level. However, as the incoming ruling party, it will have to be sensitive to zoning issues. As the APC is a coalition, there is a risk compromise may weaken the quality of appointments,” it stated.

Furthermore, the report pointed out that Nigeria is experiencing a significant cash crunch, whereby it can do little beyond paying salaries. It also anticipates capital expenditure to be negligible in 2015 and debt to play a much bigger role in financing the budget than it had in recent years.

“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,” it added.



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