JPMorgan Projects 10% Naira Devaluation by Q2, 2020

• JPMorgan Projects 10% Naira Devaluation by Q2, 2020

Analysts from global investment bank JPMorgan on Wednesday predicted that the Central Bank of Nigeria (CBN) would devalue the Nigerian Naira by 10 percent from the current N366.5 to a US dollar to N400 by June 2020 if oil price remained below $40 a barrel.

Ayomide Mejabi, an analyst with JPMorgan, said in a note to clients that he expected the apex bank to react differently this time compared to the 2014-2016 period when the CBN defended the naira rather than devalue the currency like Angola and Egypt.

“In our view, the CBN probably will not repeat mistakes made during the 2014-2017 FX crisis, when it reacted to the sharp oil price decline by restricting FX supply, and defending an exchange rate peg,” Mejabi wrote.

“This time around we expect the central bank to allow a modest FX adjustment, in the hope that it will be sufficient to stop portfolio outflows.”

Mejabi, however, said the projection was for $30-$40 per barrel oil price, that price range of $20-30 per barrel would necessitate even bigger devaluation.

Brent crude, against which Nigeria’s oil is benchmarked, declined by 30 percent on Monday to around $31 per barrel, below federal government benchmark of $57 for the year.  Presently, Brent crude oil is trading $33.27 per barrel.

The Nigerian foreign reserves has been on the decline since peaking at $45 billion in June 2019 and presently stood at $36.2 billion. This, experts projected could get worse with the CBN method of defending the Naira, especially in an import-dependent economy like Nigeria.

Mejabi said with non-resident debt investors holding about $8 billion, capital flight would surge in the coming weeks with fast-spreading coronavirus. This, he said would plunge the foreign reserves even further to $30 billion.

“With non-resident holding of domestic debt estimated at around $8.0 billion and amid expectations of accelerated outflows in coming weeks, FX reserves could fall to around US$30bn fairly quickly,” Mejabi predicted.