United Capital Limited has released the Nigerian Economic outlook for 2020 where it rules out Naira devaluation but credited possible harminsation of the local currency.
In a report titled: Nigeria Economic Outlook 2020: A different playing field, it said that while a currency devaluation is unlikely in the immediate-term, there is a possibility for the harmonization of the official rate from N305.5/$1 to something very close to the I&E window rate of N360.0/$1.
in the medium term. Hence, the adjustment may not really affect the market rate by more than a spread of 2% to 5% to the official rate. Overall, our outlook for the naira is stable in the near term with a potential harmonization in the medium – to – long term.
On capital flows, it said no significant change is expected in the current dynamics. More specifically, the CBN is likely to sustain its Open Market Operation sale to Foreign Portfolio Investment in support of the reserves.
This may keep FPIs interest dominant in money market funds at the expense of equity flows. Notably, we expect an upsurge in Loans & Other Claims to continue, given the low-interest-rate environment in the international debt market. However, Foreign Direct Investment (FDI) flow may remain broadly muted.
“On the exchange rate and capital flows, we expect the CBN to continue to support the naira at N360-N365/$1 levels, by selling OMO bills to FPIs (Foreign Portfolio Investors) as a strategy to preserve the reserves at decent levels. At the current run rate, this can be sustained for another seven to nine months, all things being equal. Nevertheless, we acknowledge the growing concern about an impending devaluation of the naira,” it said.
Notably, a quick sequence of monetary policy actions, particularly those relating to sales of CBN’s OMO bills announced since Jul-19, changed the dynamics in the Nigerian financial market in H2-19. While the currency market remained broadly stable, supported largely by the CBN’s sustained FX intervention, the equities market tumbled 14.6%y/y. Also, the average yield in the fixed income market moderated from 14.5% in Dec-18 to 9.7% in Dec-19
2020 is a different playing field for capital market players. The fixed income market will be a corporate/ private issuer market due to the buoyant level liquidity and the low yield environment. Yields on FGN T-bills are projected to stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in H1-20.
Hence, interest in riskier assets, mostly corporate papers, will increase. The rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in Q1-20 while preserving the stock of reserves above the $30.0bn threshold. Overall, we expect the sovereign yield curve to remain normal in H1-20. However, this may reverse to a hump-shaped curve from Q3-20.
For equities, the continued auction of high yield OMO bills to FPIs may keep foreign interest in local equity market tepid amid fears of a naira devaluation and confidence deficit in the economy.
Again, FPIs are likely to continue their flight to safety by swapping/selling equities for low-risk OMO bills. Yet, our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity. However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario, sees equities market return at +5.3% in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity.
