Except the Central Bank of Nigeria (CBN) reviews its asset allocation strategy to hedge against further depreciation in the value of the Naira, the country may have no option than to prepare for an imminent further slide before the end of 2015.
This was the position of experts at WSTC Financial Services Limited in their economic review for the first half of the year and outlook for the second half of 2015.
Indeed, the experts noted that though investor confidence and moderate rebound in financial market performance is expected in Q4 2015, the rebound may be fostered with early unveiling of policies and economic plan.
Besides, they also retained their double digits outlook for headline inflation for the remaining half of 2015, driven by the recent exclusion of importers of some classes of items from the nation’s foreign exchange markets by the CBN and intervention funds extended by the federal government to state governments.
According to the experts, with about $29 billion being spent by the apex bank on defending the naira amid unstable sharp slide in global crude oil prices, a further slide in the value of the Naira is imminent, as there remains a rising demand pressure in the FX market (particularly the parallel market segment) due to dwindling macroeconomic fundamentals, low fiscal buffers and weak foreign exchange inflows available to meet elevated demand.
Indeed, the experts urged asset allocation strategy that underweighs equities in the short term and hedges against further depreciation in the value of the Naira.
“We believe that the CBN’s tight monetary stance aimed at ensuring stability in the forex market and curbing inflation will continue to support attractive yields in the fixed income market.
“The CBN’s recourse to other monetary and administrative options with the cocktail of policies introduced proved ineffective as downward pressure in the forex market prevailed. Also, the restrictions placed on access to foreign exchange by the CBN in its bid to conserve the limited foreign exchange only further intensified the unease in the market.
“Nonetheless, we expect the demand pressure in the forex market to persist and dwindling macroeconomic fundamentals and low fiscal buffer. We believe the right course of action by the apex bank is to allow for a further slide in the value of the naira in order to boost government earnings and also put a check on depletion of foreign reserves.
“We reckon that the prevailing uncertainty and economic directions by the Buhari-led administration portends a key downside risk to financial markets. However, we expect improved investor confidence and moderate rebound in financial market performance in Q4 2015 as uncertainty and clarity sets in upon the announcement if policy makers and economic direction b y the current administration”, the experts added.
