JP Morgan, a global American financial services company, says the naira is anticipated to strengthen and trade at roughly N600 to the dollar in the upcoming months.
The forecast was released by the financial institution on Thursday.
The Central Bank of Nigeria announced the unification of all segments of the foreign exchange (FX) market on Wednesday, indicating that market forces will now determine the exchange rate.
The apex bank’s new policy followed a declaration by President Bolu Tinubu that the “monetary policy needs thorough house cleaning. The Central Bank must work towards a unified exchange rate”.
It was earlier reported that the naira, during trading hours, sold for between N750 and N755 per dollar before appreciating to close at N664.04.
Analyzing the naira float, JP Morgan said although it would take a few days for the dollar/naira spot to stabilize, it fully anticipates an initial overshoot towards the parallel market rate of below 750 or higher.
“While it will take a few days for USD/NGN spot to settle, we fully expect an initial overshoot towards the parallel market rate of -750 or higher, after which, we expect USD/NGN to settle in the high 600s over [the] coming months,” the statement reads.
“We remain long USD/NGN via non-deliverable forwards (NDFs) as well as OW emerging markets bond index global diversified (EMBIGD) index as we expect further positive catalysts to materialize in the near-term.
“We believe there is room for incremental positive surprises with respect to reform depth and execution speed. We had high expectations for the new administrations reform agenda, however, the speed of execution has proven to be a positive surprise.”
‘High Petrol Price Could Spike Headline Inflation To 20%’
Meanwhile, President Bola Tinubu had pronounced that the petrol subsidy payments had stopped, while delivering his his inaugural speech on May 29.
The Nigerian National Petroleum Company (NNPC) Limited immediately adjusted the pump price across its retail outlets nationwide.
JP Morgan said the surge in the country’s petrol price could culminate in a headline inflation increase from 22.41 percent in May 2023, to the 25 percent mark in June 2023.
“The near tripling of fuel prices could see headline inflation jump closer to the 25 percent mark in June and remain firmly above 20% for the rest of the year,” the bank said.
“However, fuel subsidies accounted for 1.7 percent of GDP in 2022 and a complete removal will be positive for the fiscal accounts, although we expect that some portion of the savings will be targeted towards social spending.
“Of course, a weaker exchange rate means the government would receive higher naira revenues from oil and gas exports.
“We believe the devaluing of the naira yesterday could have a more limited impact on headline inflation given a substantial part of the informal economy accessed dollars at the much higher parallel market rate.”
According to JP Morgan, the new policies on both FX and petrol prices will need “some ironing out once a cabinet is announced, we believe there is room for more near-term reform execution surprises”.
