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NSR H2 2019 Excerpts - Currency - Near-term FX stability remains intact

• In today’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated the foreign exchange market in H1 19 as well as our outlook for pull and drag of foreign exchange flows over the rest of the year.
• In our H1 2019 Nigeria Strategy Report, we projected that the confluence of lower demand for imports, slower rate of repatriation of offshore holdings of maturing fixed income instruments and CBN’s apathy to initiate/renew maturing swap positions will result in slower intervention by the apex bank over 2019, with estimated average monthly sale of $4.5 billion. True to our words, average monthly FX outflows through the CBN declined 11.4% over H1 2019 to $4.9 billion (vs. $5.6 billion in H2 2018). Specifically, relative to H2 18, CBN intervention sales at the IEW declined by 81.3% to $1.43 billion, while sale at the Interbank (SMIS, SME, Invisibles and Others) declined by 18.8% to $11.1 billion. On the flipside, average BDC sales over H1 19 expanded by 28% to $1.2 billion from $943 million in H2 18, as CBN increased its frequency of sales over the review period. For clarity, CBN tuned up its frequency of dollar sales to BDCs to four times a week (previously three), bringing weekly intervention per BDCs to $75,000 by December 2018.
• While our base scenario (even worst scenario) suggest a comfortable position for the apex bank and the naira, we believe the distorted interplay of demand and supply at the IEW and the increased demand at same would drive short term volatility in rates to result in Naira depreciation between N363.0/$ to N366/$ over H2 19. On our purchasing power parity model (PPP), the fundamental value of naira lies between N395.0/$ to N400.4/$ (8-8% - 10% down-leg from current NAFEX rate of N361.6/$). However, we fully recognize many stipulations behind expecting mean reversion from real effective exchange rates (REERs) and PPP, we refrain from interpreting the results of our analysis as a viable trading signal.