RenCap: Nigerian naira and Kenyan shilling are 20 percent overvalued

13 Jul 2015
Financial Nigeria


Macro imbalances and dollar strength place overvalued SSA currencies at risk of sizeable depreciations.

Godwin Emefiele, Governor, Central Bank of Nigeria

Looking at the pressures facing Sub-Saharan African currencies, Renaissance Capital has found that of the eight SSA currencies it analysed, the Kenyan shilling particularly faces significant depreciation. It also found that the Nigerian naira should weaken more than the shilling.

In its research note, Sub-Saharan Africa’s currencies: Which are most vulnerable?, released today, RenCap said macro imbalances and dollar strength place overvalued SSA currencies at risk of sizeable depreciations. Both the naira and the Kenyan shilling are around 20 percent overvalued, according to RenCap’s evaluation of Kenya and Nigeria real effective exchange rate (REER). Meanwhile, the Ghanaian cedi and Tanzanian shilling, which are undervalued, may remain so.  

Monetary tightening by the Central Bank of Kenya, low exports, growing imports and a weak shilling recently led Renaissance Capital to lower its economic growth forecast for Kenya to 5.2%, from 6.0%. Rate hikes by the U.S. Federal Reserve are also expected to create further shocks in SSA monetary space.
Over the next six-to-twelve months, the U.S.-based IPO investment adviser expects the naira to depreciate by 18 percent to N235/$1; while it sees the Kenyan shilling depreciating by 7 percent. Thus, it has revised its YE15 shilling forecast to KES109/$1 as against the previous forecast of KES100.7/$1.

During a briefing to the National Assembly last week on the state of the economy, the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, stated that the country’s foreign reserves had increased from the $29.1 billion position at the end of June to $31.89 billion as at July 7th. This appeared to be some good news given the constricted outlook of the CBN’s tight monetary policy. Recently, it placed restrictions for the purchase of foreign exchange for the importation of some 41 consumer and intermediate products. Nevertheless, there are reports of pent-up forex demand of up to $4 billion amid the very limited scope for further policy tightening to defend the naira.

As long as the price of oil, the biggest source of Nigeria’s foreign reserves, in the international market remains low, RenCap says it expects the naira to depreciate further.  

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