CBO Capital Partners, a Lagos-based advisory, investment and management firm, has said that the naira will experience more pressure in the fourth quarter in spite of the efforts being made by the Central Bank of Nigeria to reduce it.
CBO Partners, in its ‘Macro-Economy’s Q3 Review and Q4 Outlook’ analysis, obtained on Sunday, said the pressure on the naira would be more intense as shown by the increased spreads between the official exchange rate and other markets (Bureau de Change and parallel).
“The naira will continue to experience pressure in the Q4 on the back of the risk factors underpinning the widening of the spreads, particularly as foreign portfolio investors adjust – a sentimental reaction – to the United States tapering of its Quantitative Easing due for this quarter,” the report noted.
According to the CBO, the ability of the CBN to effectively defend the naira will be dependent on foreign reserves strength, which may be undermined by the government’s increased spending in anticipation of the general elections.
The CBN had reiterated its intent to preserve the value of the naira.
The report predicted that the government’s revenue shortfall and increased borrowing would continue in Q4, adding that “government spending would increase particularly as the elections beckon.”
The CBO, however, noted that during the fourth quarter, oil prices were expected to be favourable as long as the Middle East unrest continued.
Giving the outlook for the banking sector in Q4, the report says, “With the introduction of the 50 per cent cash reserve requirement, we expect the banks to increase their risk appetite; private sector loan portfolio should grow as they attempt to maintain profitability.”
The investment firm said it expected the current pressure on rates to continue in long term, predicting that increased spending pressure into 2015 would loosen fiscal policy and impact on foreign exchange and interest rates.
“We expect the exchange rate pass-through to reflect in domestic prices; average inflation is expected between 6.8 per cent and 7.8 per cent,” the report adds.
The report stated that in view of the continuing recovery in advanced economies, central bankers in America and Europe were expected to effect further changes in monetary policies in the fourth quarter.
Consequently, the report noted that the dynamics in the global economy would have some implication for Nigeria.
The report states, “Scarcity of foreign portfolio inflow may not ease in Q4. The US Federal Reserve’s decision to postpone tapering may, however, slow funds reversal from emerging and frontier economies, including Nigeria. Naira is to be bolstered as a result.
“The recent rise in oil prices as a result of escalating geopolitical crisis in the Middle East and sustained oil price will result in revenue increase for the Nigerian economy, in so far as oil output is below projections.
“Should a sustainable Eurozone recovery ensue, activity in trade between Nigeria and other Euro area economies could pick up again.”
Source: Punch
