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Q4'20 FX OUTLOOK - Stability in Diversity

Risk-off sentiments, triggered by COVID-19, pummelled several emerging and frontier currencies in the first half of the year. Petro-currencies, such as the Nigerian Naira and the Angola Kwanza, had to endure even more pain as both currencies have weakened by 6.2% and 30.1% YTD respectively. The pandemic stifled the supply of foreign exchange due to the sharp decline in commodity prices, tourism receipts and remittances. As a result, pent-up demand emerged for haven assets such as gold, providing support for the Ghanaian Cedi. Ghana has experienced relative currency stability as the surge in gold exports - coupled with a lower oil import bill - sustained dollar liquidity in the economy. In contrast, Nigeria witnessed significant outflow of portfolio investment that resulted in a double devaluation of the Naira as oil prices – the main source of FX to the economy - fell due to the twin impact of slow demand and OPEC+ overproduction.

All eyes on the CBN’s FX unification efforts
We believe the eyes of both domestic and foreign investors will remain on the forex unification efforts of the Central Bank of Nigeria. As highlighted in the short-term Economic Sustainability Plan, we expect further moves by the CBN to reduce arbitrage opportunities in the foreign exchange market. We also look forward to new foreign exchange policies aimed at stalling the slide in reserves and provide support for the Naira peg, barring the possibility of another slump in oil prices amid a budding coronavirus second wave. We believe the expected inflow of $200m guarantee from the P&ID suit will provide some support to the Naira. However, further delay in other concessional flows may limit the Bank’s ability to respond to new layers of pressure. Express clarity on FX unification efforts could induce portfolio inflows given the relatively low Price-to-Earnings ratios in the equities market, although the low yield environment in the fixed income market remains a deterrent.