Fitch: Nigeria's FX market yet to stabilise

Fitch Solutions recently made a bold prediction for the Nigerian Naira, expecting it to slide to as low as 1,993 naira per dollar by 2028. This forecast comes in the midst of ongoing efforts by the Central Bank of Nigeria to stabilize the foreign exchange market. Abdulazeez Kuranga, Regional Economist for West Africa at Standard Bank Group, shed light on the current state of the market and what factors are at play in this uncertain environment. Kuranga emphasized the importance of stabilizing the market, noting that the appreciation bias seen earlier in the year prompted strategic interventions by the CBN to avoid drastic fluctuations in the exchange rate. He highlighted the significance of aligning currency movements with inflation and interest rates to ensure a balanced FX market. Looking ahead, Kuranga pointed out the need to address inflation dynamics as a key determinant of the Naira's future performance. Regarding Fitch's mention of the ongoing flexibility of the exchange rate being put to the test, Kuranga interpreted this as a sign of lingering instability in the market. The fluctuating levels of the Naira in recent weeks indicate that true stability is yet to be achieved. He stressed the importance of sustained stability to attract both foreign and domestic investors, citing uncertainties around currency depreciation as a factor that may deter offshore investment. One of the key indicators Kuranga discussed was the sentiment of local investors, highlighting their influence on overall market confidence. He pointed to FX deposit trends as a crucial metric, noting a recent decline in FX balances on domiciliary accounts, signaling a potential shift in sentiment towards the local currency. These early signs of reduced dollarization offer a glimmer of hope for market confidence, albeit amidst ongoing challenges. Looking ahead to the upcoming Monetary Policy Committee (MPC) meeting, Kuranga shared his expectations of further interest rate hikes in response to inflationary pressures. With rising fuel prices and agricultural challenges impacting inflation, he anticipated a moderate increase in key policy rates to mitigate these economic pressures. The outlook for the Naira remains contingent on these policy decisions and the broader economic landscape, creating a sense of caution among investors. In conclusion, the future of Nigeria's FX market hangs in the balance as stakeholders await policy interventions and market signals to navigate the evolving landscape. The path to stability may be fraught with challenges, but with strategic measures and collaborative efforts, the Naira could find its footing in the global currency arena.