Nigerian naira is trading at fair value says Pabina Yinkere

Lagos, Nigeria (Capital Markets in Nigeria) — Is naira overvalued or undervalued? It depends on which methodology is used; results could point to an overvaluation or undervaluation. Using a relative PPP methodology, the result suggests the currency is trading near its fair value at N199-200/USD and we are somewhat inclined to this conclusion. Practically, it is unlikely to trade around these levels under a floating market arrangement as the market is pricing in economic risks associated with the decline in the oil price as well as economic uncertainty associated with the political transition. That’s why the 6-month forward is being priced at NGN234/USD.

The current measures put in place by the Central Bank of Nigeria (CBN) are in line with general feel that the official FX demand is over bloated and there is a need to weed out that demand through administrative measures. In that sense, the measures could be said to be in the right direction. Some of these measures have however hampered FX liquidity – a key pre-requisite for financial market stability and this need to be addressed very quickly.

The CBN appears to be doing all it can; the government on the other hand could do a bit more by committing to fiscal discipline through a leaner budget and more effective utilization of revenues. Nonetheless, the overriding theme is the direction of the oil price. As long as it appears it has not reached a bottom, it’s unlikely these measures will restore confidence to the markets.

By Pabina Yinkere, Head, Research at Vetiva Capital Management, Nigeria