“Naira Looks Cheap”, to Appreciate to N1,200/$1 – Goldman Sachs

Goldman Sachs analysts Andrew Matheny and Bojosi Morule have projected a significant appreciation of the exchange rate to N1,200/$ in 12 months.

This amounts to a massive recovery from its perceived undervalued state. 

This forecast hinges on Nigeria’s transition away from unstable monetary policies and significantly negative real interest rates, leading to a significant naira depreciation. 

The report by the analysts outlines that over the past nine months, the naira has experienced a cumulative weakening of 60-70%. 

However, the tide is expected to turn due to the advent of positive real rates and a pivot towards more orthodox policy frameworks, marking the beginning of Nigeria’s recovery from its currency crisis.

The analysts noted that for lasting macroeconomic stabilization, continued and sustained efforts are required.

A looming risk to this forecast is the potential faltering by Nigerian authorities in maintaining the orthodox monetary pathway and tightening policy adequately to draw in the needed capital inflows. 

The Goldman Sachs analysts commended the recent monetary policy transitions under President Bola Tinubu, noting the significant shift towards inflation targeting and a more flexible exchange rate as positive developments. 

Despite these forward-looking reforms, the initial implementation phase was criticized for its lack of depth until recent times.

The absence of a clear policy anchor and a defined strategy previously left the naira vulnerable, leading to escalating inflation and currency depreciation.

Highlighting the necessity for positive real interest rates and external financing to mitigate Nigeria’s currency and liquidity crisis, the analysts’ report sees recent policy adjustments and bill issuances by the central bank as steps in the right direction.

Nevertheless, they emphasize the need for more decisive rate increases and a firm confirmation of policy shifts to attract meaningful foreign inflows. 

Excerpts from the report 

• “We argued that addressing Nigeria’s currency and external liquidity crisis required positive real interest rates and capital inflows, conditions that were both present – at least in a limited form – for the first time last week on the back of the central bank’s monetary policy adjustments and bill issuance. 
• “In our view, this is the cue to turn constructive on the FX outlook, even if more decisive rate increases and confirmation of the policy shift are likely required to attract meaningful foreign inflows. This is especially the case given that, in the near term, inflation on our estimates is likely to rise further on the back of lagged currency depreciation, and given that real interest rates are still comparatively low relative to elsewhere (most notably Egypt, which is likely to be a beneficiary of large inflows on the back of recent policy adjustments). 
• “We think the Naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5% of GDP in 2023Q3, and we expect it to increase above +5.0% on the recent FX moves and associated import compression. We thus see reason for the Naira to be undervalued, and we see it appreciating to 1200 within the next 12 months.”