March 23, 2020/Cordros Report
On Friday, the CBN announced a “re-alignment” of the currency, moving the official rate upwards from NGN305.00/1USD to NGN360.00/1USD. This move came amid the deteriorating macroeconomic picture following the crash in the prices of crude oil. Beyond that, the CBN also effected a non-parallel upward shift along the rates sold at different FX windows.
Feeling a bit like Déjà vu? – If these exchange rates regime sound familiar to you, it is because we’ve been here for a while. Unrelatedly though, while this adjustment came in earlier than we foresaw, the action was broadly in line with our view as outlined in our last currency update (see report: Coronavirus-Induced Oil Price Crash: FX Risks Rise), where we highlighted that the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira may eventually force the CBN to capitulate.
The Naira is Still Far From its Fair Value – The argument is that, while the naira devaluation is in sync with the deteriorating balance of payment position following the precipitous decline in crude oil prices, the magnitude of the move is still a notch below the levels necessitated to align with long-run fundamentals. Utilizing the purchasing power parity model, the naira should be trading at NGN416.42/USD if it were to be fairly valued. From our empirical assessment, a smaller currency re-alignment relative to domestic inflation and balance of payment deterioration will only stabilize the exchange rate for some time before the inevitable collapse as currency speculators move in.n.
Monetary Policy Meeting: Between the Rock and a Hard place
That said, since the last monetary policy in January, we have quickly moved from assessing the positive impact of the US-China Phase 1 trade agreement on global growth, to a possible global economic recession, occasioned by the rising cases of infections and deaths across the globe, due to the Covid-19 virus. Furthermore, the recent jostling for market share in the oil market between Saudi Arabia and Russia also raises the questions of how low oil prices can go and the potential impact on net oil-exporting countries.
For Nigeria’s monetary policy committee, the combination of inflationary and currency pressure will place a ceiling on the size of economic growth stimulus packages that may be introduced. In our view, of all mandates competing for attention as the MPC commences its policy meeting today, we believe policies to limit the impact of Covid-19 on economic growth will take the centre stage. To our minds, the recently announced currency re-alignment, together with lower maturity profile over the rest of 2020 will buy little time for the committee to tackle growth problems amid the volatile FX market and persistent inflationary pressure. Thus, we do not rule out between 50-100bps benchmark rate cut and additional pro-growth policy announcements.
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