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Nigeria Strategy Report H2 2018 Excerpts - Currency: The Battle for Naira Stability

• In our H1 18 Nigeria Strategy Report, we projected a blow in FX outflows that will impulse the CBN to step up its intervention across FX markets. Our projection was based on the confluence of policy normalization in developed markets, flight to safety across EMs, lower domestic interest rate environment, and political risk in the domestic clime. True to our prognosis, average monthly FX outflows rose 15.4% over H1 2018 to $3.6 billion (forecast; $3.3 billion), which prompted an accelerated pace of intervention by the CBN. For context, CBN sales expanded at the IEW[1] and interbank markets over H1 18 – IEW (+122% to $1.96 billion), BDC (+83% to $2.89 billion) and Interbank sales (+56% to $11.4 billion) to drive overall intervention to $16.3 billion (+66.5%). Consequently, the NAFEX[2] and BDC rates remained relatively stable over H1 18, closing the period at N5/$1 and N362.3/$1 accordingly.
• Coalescing our adjusted CBN outflows and inflows, we estimate monthly average reserve drawdown of $310 million (average accretion of $1.3 billion in H1 18) which summed up to $1.9 billion over H2 18 (vs. $8.0 billion accretion in H1 18) – notwithstanding Eurobond issuance – which should dwarf any significant accretion in the foreign reserve to $45.7 billion. Consequently, we expect the apex bank to put its full ammunition to use to keep the Naira at current bands, which would maintain stability in the short term to keep the interbank at N361/$ for the rest of 2018. Further down, the distortion of the free interplay of demand and supply at the IEW with the lag expected from CBN intervention – amidst pressure at other windows as in May 18 – would drive short term volatility in rates and an eventual adjustment to our fundamental driven purchasing power parity estimate of between N17/$ to N402.48/$ (7-10% down-leg from current NAFEX rate of N361.00/$ at the end of June 2018).

[1] Investors and Exporters’ Window

[2] Nigerian Autonomous Foreign Exchange Market