Deutsche Bank AG has added Nigeria to its frontier foreign exchange (FX) monitor, describing the naira as undervalued and forecasting further appreciation against the US dollar.
A reports that according to Bloomberg, the German lender said in a client note on Monday that the naira offers attractive carry and favourable real interest rates, factors it considers supportive of the currency’s outlook.
However, the bank warned that rising government borrowing could threaten the naira’s prospects.
“The principal risk to the outlook is from the fiscal side,” Deutsche Bank said.
The lender cited the Debt Management Office’s (DMO) bond issuance calendar for the fourth quarter, which points to “elevated issuance levels”.
Deutsche Bank expects government spending to increase ahead of Nigeria’s January elections but believes there is “less risk from the elections themselves”.
The naira has appreciated by nearly 8 per cent against the dollar this year, placing it among the 10 best-performing currencies out of 144 tracked by Bloomberg.
The currency’s gains have also boosted returns on Nigerian equities and local-currency bonds, which are among the strongest-performing assets globally, according to the publication.
Deutsche Bank’s frontier FX monitor also tracks Angola’s kwanza and Ghana’s cedi. The lender said the three African economies had performed well this year despite the economic fallout from the conflict in the Middle East.
The Frankfurt-based bank attributed Nigeria and Angola’s improved external positions partly to higher crude oil prices, which have supported their current-account balances. Ghana, meanwhile, has benefited from firmer gold prices.
Deutsche Bank also identified high real interest rates and ample foreign exchange reserves as factors supporting investor inflows into the three economies.
While the bank sees further potential for the naira to strengthen, it cautioned that increased fiscal borrowing remains a key risk to the currency’s outlook.
