Thursday, November 19, 2020 / 09:27 AM / by United Capital Research
/ Header Image Credit: Godfreytimes
Earlier
this week, the parallel market rate depreciated to N475/$1- its weakest level
in 12 weeks - as a result of the inability of the official
market to satisfy the huge demand backlog by manufacturers,
traders and foreign investors seeking to
repatriate capital. Since September, the CBN
has allotted over $1.0bn to BDCs in a bid to inject more
liquidity and ease demand pressures, according to media sources. However,
the volatility in the markets remained unabated.
The recent pressure on FX rates is attributable to a number of
factors: First, legitimate FX demand by manufacturers whose
obligation to their foreign suppliers continues to
increase. Additionally, elevated demand for dollars appear driven by
festive season related importation in anticipation of yuletide sales as
well as year-end travel linked demand. Finally, speculation by market participants
who expect the Naira to depreciate even further continues to weigh on
the parallel rate.
In our view, the current foreign exchange pressure is likely to be
sustained through the end of the year as demand for festivities-related
imports rises through December. We note that the CBN's restrictive
policies, targeted at reducing demand, may end up hurting
businesses and forcing even more
demand pressure on the parallel market. This may further widen
the spread between official and parallel market rates. As such, any
moderation in the parallel market rates will depend on a fundamental change
in the factors currently affecting supply: low oil prices and
the dearth of foreign capital inflows into the country.
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