Deutsche Bank adds naira to frontier FX monitor, sees more gains

Deutsche Bank has added Nigeria to its frontier foreign exchange monitor and described the naira as undervalued, with room for further gains against the dollar. The German lender pointed to Nigeria's improving external position and relatively high real interest rates as factors that could attract more capital.

The naira strengthened by N6 in September, closing at N1,329.50 per dollar, as foreign investor interest in Nigerian assets grew.

September gain and carry trade appeal

Central Bank of Nigeria data showed the naira gained 0.45% against the dollar in September. It moved from N1,335.50 per dollar at the end of August to N1,329.50 per dollar at the close of September. That represented a N6 improvement.

Bloomberg reported that strategists at Deutsche Bank see the currency as an opportunity for investors seeking to profit from interest rate differences across markets, a strategy known as the carry trade. The bank said high real interest rates could increase demand for naira-denominated investments as foreign investors seek competitive returns.

The appreciation has also boosted returns on Nigerian assets, including equities and domestic bonds, drawing fresh attention from international investors.

Oil and peer currencies support outlook

Nigeria's oil revenues are another factor supporting the outlook. Higher crude oil prices can boost export earnings and foreign exchange supply, strengthening the country's external position.

Deutsche Bank also tracks Angola's kwanza and Ghana's cedi. Both have performed strongly this year, partly because of favourable commodity prices.

Fiscal risks and subsidy warning

Despite the positive assessment, Deutsche Bank warned that fiscal pressures could threaten the naira's gains. It said: “The principal risk to the naira outlook is from the fiscal side, with elevated government bond issuance levels.”

The lender expects government spending to increase ahead of Nigeria's January elections, potentially straining public finances and affecting domestic financial markets. It suggested the elections themselves pose less of a threat than the borrowing and spending decisions surrounding them.

Sustained naira gains will depend partly on steady foreign exchange inflows, attractive domestic investment returns and the government's ability to manage fiscal pressures.

Earlier, Taiwo Oyedele, Nigeria's Minister of Finance and Coordinating Minister of the Economy, cautioned that restoring petrol subsidies could push the naira as low as N4,000 to the dollar. He warned that even a hint of policy reversal would be enough to rattle financial markets. Oyedele spoke at a press briefing after the International Monetary Fund and World Bank annual meetings in Bangkok, Thailand, on Monday, October 19. He said foreign and local investors would not wait for a formal policy announcement before reacting.

For Nigerian businesses and consumers, a stronger naira could ease import costs and pressure on prices, but the fiscal risks flagged by Deutsche Bank mean the gains are not guaranteed.