Economy
Nigeria’s Exchange Rate Will Further Depreciate in 2024—S&P
By Adedapo Adesanya
The road ahead is rough for the Naira in 2024 as projections from Standard and Poor’s (S&P) Global Ratings show that the exchange rate will further depreciate, triggered by Nigeria’s broadly flat reserves which limits the supply of the much-needed foreign exchange (FX).
In its Nigerian Banking Outlook 2024, the firm said higher import costs, arrears of FX transactions, and lower FX receipts stemming from oil exports would constrain growth in FX reserves.
“We forecast usable FX reserves of $28 billion in 2024,” the agency said.
It acknowledged the moves by the Central Bank of Nigeria (CBN) to clear backlogs, but these were largely inadequate as the market faced weak supply challenges, reaffirming a similar assertion by Fitch a few days ago.
The CBN has made efforts to clear approximately $2 billion out of a $7 billion backlog of FX transactions, while President Bola Tinubu was able to get Saudi Arabia to pledge FX support.
However, S&P said the Nigerian currency would continue to depreciate because of structural supply constraints, while the country’s import cost would rise higher than current oil exports due to the rates.
Nigeria gets 80 per cent of its foreign exchange from oil, but production has been hit due to the triple whammy of theft, structure vandalism, and underinvestment.
“We expect the current account to record a small surplus averaging below 1 per cent through 2025 as the import bill increases faster than oil exports due to high prices.
“While the Naira trades closer to a managed float rather than being a fully free-floating currency, the exchange rate is now significantly more in line with market demand and weak supply fundamentals,” S&P said.
The exchange rate fell below N1,200/$1 in December 2023, recovering to about N850/$1 thereafter but now the rates are trading at N900 per Dollar at the Nigerian Autonmous Foreign Exchange Market (NAFEM) and selling for as high as N1,300 at other unregulated market segments.
The firm also currency depreciation and inflation will put pressure on asset quality as credit losses for the sector rose 3.5 per cent in 2023 due to currency depreciation, high-interest rates, and inflation, adding that while the sector’s NPL ratio will moderate in 2024, it will hover below the 5.0 per cent regulatory limit due to the currency effect on gross loans.
It noted that the CBN would likely hike interest rates from the current 18.75 per cent.
“Credit cycles are inherently correlated to oil prices and currency depreciation. Further rate hikes are possible due to the gap between inflation and the CBN’s benchmark rate. This will put pressure on borrowers as banks pass the full rate increase on to them.
“Credit risks also stem from energy transition risks, because loans to the hydrocarbon sector still represent a sizable share of the banking sector’s loans, at about 30 per cent of total loans. The banking system’s dollarization will increase following the naira depreciation in June 2023. We estimate that FX loans will reach 55 per cent of total loans,” it stated.
By Adedapo Adesanya
The Naira opened the new trading week on a negative note on Monday at the Nigerian Autonomous Foreign Exchange Market (NAFEX) and the black market.
At the parallel market, the Nigerian currency weakened against the US Dollar by N5 to sell for N1,380/$1 compared with the preceding session’s rate of N1,375/$1, and at the GTBank FX desk, it shed N1 to trade at N1,373/$1 versus N1,372/$1.
At the official market, it lost 63 Kobo or 0.05 per cent against the Dollar during the session to close at N1,362.84/$1, in contrast to last Friday’s value of N1,362.21/$1.
However, the Nigerian Naira gained N2.30 against the Pound Sterling at the spot market yesterday, quoting at N1,821.29/£1 compared with the previous rate of N1,823.59/£1, and improved against the Euro by 23 Kobo to settle at N1,574.35/€1 versus N1,574.58/€1.
Data from the Central Bank of Nigeria (CBN) showed that interbank forex turnover increased to $92.248 million across 90 deals, from $73.565 million last Friday.
On the policy front, participants believed that the application of the fourth edition of the Foreign Exchange Manual of the central bank, which introduces updated guidelines for foreign exchange transactions and tightening compliance requirements for authorised dealers and market participants, will enhance market flexibility and ease previous restrictions.
Meanwhile, the cryptocurrency market snapped from recent declines, jolted by Strategy’s purchase of 1,550 Bitcoin for approximately $101 million, increasing its total holdings to 845,256 BTC. The company raised $181 million through common stock sales, using the proceeds to fund the bitcoin purchase and increase its cash reserves to $1 billion, pushing the price of the coin higher by 3.2 per cent to $63,731.69.
Cardano (ADA) appreciated by 8.4 per cent to $0.1738, Ethereum (ETH) rose by 5.2 per cent to $1,711.54, Solana (SOL) expanded by 5.1 per cent to $67.82, and Ripple (XRP) improved by 4.9 per cent to $1.18.
Further, Dogecoin (DOGE) jumped by 4.3 per cent to $0.0873, Binance Coin (BNB) soared by 2.7 per cent to $609.50, and TRON (TRX) increased by 0.7 per cent to $0.3274, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $0.9997 and $0.9998, respectively.
By Aduragbemi Omiyale
The federal government has been advised to consider exploring other funding sources to finance its budget deficits.
Speaking with Punch recently, the chief executive of CSA Advisory, Mr Aliyu Ilias, said the current appetite for borrowing by the government cannot be sustained because it elevates debt-servicing costs.
The economist suggested the sale of some public assets and the involvement of the private sector in infrastructure financing for economic growth.
According to him, running to the debt markets to raise funds for the government is not the best route to take, as the reliance on borrowing always leads to higher debt-servicing obligations.
“The more you borrow, the more you are also incurring more debt services,” he said, tasking the government to also capitalise on increased oil revenues stemming from ongoing geopolitical tensions in the Middle East.
“The government can actually sell off some of their assets to raise more money. The government can also, if you look at the revenue we are getting from oil, it’s getting more, especially with this war. It’s another opportunity for us to actually not borrow again,” Mr Ilias submitted.
He also pointed to ongoing tax reforms as another avenue to improve government finances and narrow the fiscal gap.
“The government can also look at tax reform. The fact is that the government does not have money. The only chance for getting more money is to address the financial deficit,” he added.
By Adedapo Adesanya
Crude oil was up by $1 on Monday as Iran and Israel said they had halted attacks on each other following an appeal from US President Donald Trump.
Brent crude futures gained $1.16 or 1.3 per cent to trade at $94.25 a barrel, while the US West Texas Intermediate (WTI) crude futures were up 76 cents or 0.8 per cent to $91.30 per barrel.
Iran’s military said Monday it halted attacks on Israel after the two countries exchanged their most intense strikes in months, further straining an already shaky ceasefire as well as the US-Israeli relationship. Iran, however, said it would resume strikes if Israel continued to hit Hezbollah in Lebanon.
Israel also halted attacks on Iran, Israeli Prime Minister Benjamin Netanyahu said, stopping short of acknowledging a ceasefire that US President Donald Trump said the countries were aiming for.
President Trump said earlier that the US blockade, which was introduced in April, would remain in place “in full force” until a final peace agreement between the two warring nations is reached.
Prices gained more than 5 per cent earlier on Monday after renewed Israeli strikes on Iran and attacks on Lebanon had reduced hopes of an imminent end to the wider war.
Market analysts noted that because of the strikes, investors were concerned that flows through the Strait of Hormuz might remain restricted for longer. Roughly a fifth of the world’s daily supply of oil and liquefied natural gas passed through the waterway before US-Israeli airstrikes at the end of February unleashed the latest escalation of the Middle Eastern conflict.
Yemen’s Iran-aligned Houthis said on Monday they would ban ships linked to Israel from the Red Sea after Israel renewed its military attacks on Iran, adding to concerns about global shipping and energy flows.
In the face of the supply crisis, a sub-group under the Organisation of the Petroleum Exporting Countries and its allies (OPEC+) on Sunday agreed on its fourth oil output target increase in four months. The seven members decided to increase targets by 188,000 barrels per day from July, the same as the June hike, which was adjusted down from monthly increases of 206,000 barrels per day in May and April to take into account the exit of the United Arab Emirates (UAE).
On paper, the sub-group has increased its output quotas from April to June by almost 600,000 barrels per day, but in reality, the group’s production has collapsed due to export cuts by Gulf members, averaging 33.19 million barrels per day in April compared with 42.77 million barrels per day in February.
Saudi Arabia has cut its official selling prices for crude oil to Asia in July for a second month.
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