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[Hongde Information] Significant devaluation! The exchange rate plummeted!

Jan 09,2023

Hongde International understands that as Africa's most populous country and largest economy, Nigeria is facing serious fiscal problems: increased debt, reduced income, plummeting exchange rates, soaring inflation......

1、Naira may depreciate by more than 30% in 2023

According to Zhitong Finance, a survey of investors and analysts shows that Nigeria, Africa's largest economy, is expected to depreciate its currency naira by the largest margin in six years after the February 2023 election, in line with market expectations.

Nigeria's multiple exchange rate system, dominated by a tightly controlled official exchange rate, has cut off many businesses and individuals from trading channels, driving demand to unauthorized black markets. This leads to a significant widening of the spread between the managed market and the parallel market. The difference is nearly 77%. In 2021, the Central Bank of Nigeria devalued the naira by 7.6 in a move towards a single exchange rate system.

The median forecast is that the next devaluation will weaken the naira by as much as 1/5, which would bring the naira down to 533 to the dollar. Last month, Bank of America economist Tatonga Rusike gave a similar forecast. A median of 10 respondents to the survey believe that the exchange rate of the naira against the US dollar has fallen to 583 naira to the US dollar.

The price of the Naira forward contract shows,The naira will depreciate by about 1/3 in 2023. The 20%-33% reduction would be the largest since 2016.The naira has fallen 4.5 per cent against the dollar in 2022.

2、The financial crisis is worrying.

Mark Bohlund, senior credit research analyst at research firm REDD Intelligence, said a weaker naira could push up annual inflation, leading to a one-off rise in the ratio of public debt to gross domestic product (GDP).

at present,Nigeria's annual inflation rate hits 17-year high of 21.1 percent. Debt-servicing costs consumed 83% of government revenue in the eight months to August, according to the budget office.

According to a recent report by the "Assault", many experts expressed concern that the continued deterioration of Nigeria's financial situation will trigger a crisis. According to data from the Federal Debt Management Office, 6.31 trillion naira (US $14.51 billion) was set aside for debt service in the 2023 budget, accounting for 30.8 per cent of the estimated total expenditure for the year and is expected to be 71.2 per cent higher than in 2022. The country's debt has increased by 30.72 trillion naira (US $70.62 billion) since the current president took office, up 253.47 per cent.

3、Increased risk of political instability

In addition, Nigeria and other countries in sub-Saharan Africa are at risk of social and political instability and worsening food insecurity due to rising inflation, the International Monetary Fund (IMF) said.

According to the International Monetary Fund, although inflation is not as sharp as in other parts of the world and is driven by different factors,But inflation in the region is almost twice its pre-epidemic level.. In terms of food, prices of staple foods such as maize and wheat have risen since 2019, accounting for 1/2 to 2/3 of overall inflation in the region, and 12% of the population in Nigeria and other sub-Saharan countries are expected to face severe food insecurity by the end of 2022.

In addition, the fiscal and monetary policies of various countries are facing challenges. Raising interest rates to control inflation may stifle investment credit, restrain economic activity and reduce income. Fiscal consolidation and global economic slowdown also put pressure on economic activities of various countries. However, the International Monetary Fund warned that central banks of various countries should not raise interest rates in a hurry, because this may endanger economic recovery.

4、Growth Outlook Downgraded

In the October World Economic Outlook (WEO) released by the International Monetary Fund, the IMF lowered Nigeria's economic growth outlook by 0.2 percentage points to 3.2 percent and to 3 percent in 2023. Both estimates are down 20 basis points (bps) from the July forecasts of 3.4 percent and 3.2 percent.

Nigeria's GDP grew by 3.4 percent in the first quarter of 2022, but slowed to 3.1 percent in the second quarter, with the average performance so far below the federal government's forecast for 2022.

The IMF also cut sub-Saharan Africa's growth from 3.8 per cent to 3.6 per cent, while the global economy is expected to grow by 3.2 per cent this year and 2.7 per cent in 2023, a sharp drop from the 6 per cent increase in 2021.

Risk Warning:

Nigeria is China's largest engineering contracting market, largest export market, second largest trading partner and major investment destination country in Africa. The two countries have close cooperation in various fields. According to the latest statistics from China Customs, the bilateral trade volume between China and Nepal will reach 144.09 billion yuan from January to November 2022. Among them, China's exports to Nepal were 134.44 billion yuan, an increase of 1.2 percent over the same period last year; imports from Nepal were 9.65 billion billion US dollars, down 43.9 percent from the same period last year; and the trade surplus reached 124.79 billion billion US dollars. Companies that have recently traded with Nigeria must maintain close contact with local customers and manage risks in advance to avoid losses.

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