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Naira may depreciate further this year – DLM

By on April 22, 2014

The Managing Director, Dunn Loren Merrifield Asset Management and Research Company, Mr. Tola Odukoya, says the naira faces further depreciation this year as the Central Bank of Nigeria continues to defend the local currency from the nation’s external reserves.

Odukoya, while reviewing the performance of the economy in the first quarter, said recent pressure on the naira was showing that the currency might not retain its current value throughout the year.

He said, “We are of the view that the CBN is likely to continue its contractionary monetary policy stance for the rest of the year to rein in upward inflationary pressures.

“Recent pressure on exchange rate further strengthens our position of a possible depreciation of the naira in the current year given that the nation’s foreign reserves will be further depleted if current exchange rate stability strategies are maintained.”

According to the DLM boss, the view is further supported by the CBN’s Monetary Policy Committee’s commitment to its pursuit of price stability and exchange rate objectives.

He said the erosion of the fiscal buffers through the depletion of the external reserves raised significant concerns as the economy was being further exposed to vulnerabilities.

Odukoya, however, expressed the belief that the market would remain stable through the year.

He said the issuance of more non-sovereign bonds was expected in the months ahead.

He added, “We also expect some kind of sell-off from both domestic and offshore investors to hold cash as a result of the fear of uncertainties due to the 2015 general elections.

“The impact of the new CBN leadership could affect the market as the operators will be sceptical in their dealings.”

In the remaining three quarters of this year, the analyst listed factors that would impact the market to include: the direction of monetary policy of the CBN, changes in the benchmark interest rate, and the level of foreign portfolio investments.

Others factors are the strength of the economic recovery in the developed markets and policy direction of the major policy makers in the developed countries like United States Federal Reserve Bank and the European Central Bank.

Notwithstanding the weak equities market in the first quarter, Odukoya expects select companies’ performances to be strong for the rest of the year.

He expects this to lift the overall equities market performance.

He said, “We see another round of market rally in the months ahead. Although the pick-up may not be as high as that witnessed in 2013, we are of the opinion that the Nigerian Stock Exchange All-Share Index will settle above the 40,000 point mark in the course of the financial year.”

Odukoya explained that strong performance from major companies across some sectors would serve as a catalyst for the market rally.

He said, “With the election year around the corner, we expect companies in the consumer goods space to record increase in revenues and profits due to the anticipated increase in overall spending levels.

“Given the coming elections, we are not expecting any cut in government subsidies in 2014. Thus, we anticipate no squeeze in consumer spending and believe this could be supportive of higher sales by manufacturers of consumer goods.

He explained that for producers with exposure to imported raw materials, the risk of naira depreciation – although not a certainty, and raw material price volatility in the commodities markets may expand production costs.

“However, it would not be unexpected if the resulting increase in costs gets effectively passed on to final consumers, with mild resistance, given our view that events leading to the build-up of the elections are unlikely to stifle disposable income levels,” he added.

 

 

[Punch]