The monetary authority is in a good position to ease foreign exchange (FX) pressure as its coffers have been enhanced by a sizable $7.3 billion liquidity – $4 billion Eurobond issuance and $3.3billion special drawing right (SDR) from the International Monetary Fund (IMF).
These were among the projections of EFG Hermes, in its report titled, ‘The Year Ahead 2022 – Recovery intact, but expect volatility’.
The report mentioned that a number of local banks have been active in the international debt market, raising billions of dollar, which will help improve FX liquidity.
The report stated: “We are less optimistic that this position can lead to a sustainable improvement in FX conditions. First, the country has failed to benefit from the high oil price environment, marking another disappointing development in Nigeria’s economy.”
It stated that a sharp 20 to 30 per cent drop in crude oil production and a sizable fuel subsidy bill have eaten up much of the benefit of rising oil prices, leaving the Central Bank of Nigeria (CBN) struggling to build the external foreign reserves.
“Lacking the intrinsic build-up of reserves means one-off inflows are unlikely to resolve the FX challenges.
“Secondly, the CBN has shown a clear policy preference of keeping interest rates low. As such, we think it is unlikely that the CBN would raise rates high enough to support the naira, particularly to attract foreign capital into the country.
“The 12-month treasury-bill yield currently stands at six to seven per cent, yielding negative real rates close to 10 percentage points. While we expect inflation to end the year at 12-13 per cent, we still do not think the CBN would raise rates into real positive territory. We do, though, forecast 100bps of policy rate hikes in 2022 as economic activity normalizes,” it stated.
The research also noted: “In this respect, we only expect a partial resolution to the FX problems as the CBN clears some of its backlogs. The CBN, though, would need to preserve its reserves as economic activity slowly picks up; hence, we expect devaluation to N430-440 against the USD in the coming months.”
The report identified two prospects to the outlook – a faster-than-expected rise in crude oil production, which would finally enable the country to build its reserves. The second, it stated, is the on-lending of SDR allocations by advanced economies.
“Nigeria’s share of France’s initiative to triple Africa’s allocation to $100 billion stands at $6.6 billion, representing significant upside potential.
“We are less excited about the latter, though, as we expect the funds to be allocated based on some form of conditionality. We do not believe Nigeria is in a good enough state to push ahead with reforms, especially with 2022 being a pre-election year,” it stated.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, disclosed that the government is planning to liberalise fuel prices this year and has only budgeted for six months of subsidies in the appropriation.
“We do not think such a move will see the light, as the government is unlikely to hike fuel prices by at least 50-60 per cent a few months ahead of presidential elections”, the report stated.
The report also touched on consumer goods as it expects food and beer producers to continue to grapple with cost pressure, given forex shortages and an inflationary environment – which will impair Nigeria’s consumer companies’ ability to post improved earnings.
“In terms of the top line, the low base effect enjoyed in 2021 is expected to wane, and we expect more tepid growth. Affordability remains an integral focus with smaller SKUs to cater to the lower end of the market.
“We believe sector valuations remain stretched, although Guinness Nigeria remains attractive. As 2022 is a pre-election year, electioneering activity will likely increase money in circulation, which could act as a catalyst for more discretionary and non-discretionary spending,” the report stated.