Renaissance Capital Africa report suggests that 2024 has a positive outlook for Nigeria with a strengthening currency and a rise in oil prices.
This follows its report titled “Thoughts from Renaissance Capital Africa” released on Tuesday, according to The Punch.
In the report, the firm stated that holders of equities had already seen gains of 20 per cent since the end of February, as the naira strengthened from 1,600/$ to around 1,300/$.
According to the latest report on the economy review, the Nigerian naira is still largely undervalued to its long-term average by 30 per cent at the level of N1,303 on March 28.
The research firm also noted that the capital market is setting for a good start after February’s 20 per cent gains.
It stated, “We expect a bigger rally to come. In US dollar terms, Nigerian equities are around the cheapest they’ve been in 20 years.”
Renaissance Capital Africa stressed that monetary policy was once again sensible and explained how portfolio investors were now able to invest with a certain degree of assurance that inflation would come down sooner rather than later.
With Nigeria’s 25-year average rate moved from 900/$ to 1,200/$ in last month’s update, through to this month’s model update, the average rate, it said, was now back at 912/$.
The firm explained, “So at the March 28 level of 1,303/$, the NGN is 30 per cent undervalued to its long-term average. That’s the cheapest in Africa (just decimal places cheaper than Egypt), and only the Japanese yen is cheaper among the 80 currencies we look at.
“We expect a surge in March and/or April inflation to erode that to perhaps 20-25 per cent undervalued. If the NGN stabilises at 1,269/$ – and if inflation was 20 per cent in March 2025, this would take the average rate up to around the same level by March 2025.
“As such, the naira could stay here all year – which is a much better return in one-year bonds yielding 18-19 per cent than owning US treasuries at 4-5 per cent.
“Alternatively, the CBN could drive the NGN spot rate stronger, perhaps to 1,100/$ – and then encourage a weaker monthly trajectory for the currency. So, a 10-20 per cent nominal NGN move stronger from here is plausible, and we ought to get a re-rating of the equity market too (as in Pakistan and Kenya).”
On the other hand, It stated that the obvious risks were the worsening of the current account, higher than expected inflation, and insecurity and that if inflation rises to 50 % in the next few months, much of the undervaluation of the naira would disappear.
Renaissance said, “If inflation stayed at 50 per cent into next year, the naira would become overvalued at 1,300 and would need to sell off again to become competitive. The 18 per cent yield on one-year bonds would not look so attractive if we lose 20 per cent on the currency.
“There are fiscal risks that could lead to higher inflation. The government has an expensive liability via fuel and electricity prices. The fuel subsidy may have been officially removed in 3Q23 when the fuel price went to around N550 and the exchange rate was more like N700-800/$.”
