Deutsche Bank says naira undervalued, adds Nigeria to FX watchlist

Deutsche Bank has added Nigeria to its frontier foreign exchange monitor. The German lender says the naira is undervalued and could appreciate further against the dollar.

In a client note on Monday, reported by Bloomberg, Deutsche Bank said the naira offers attractive carry and favourable real interest rates. It sees those factors supporting further gains.

Fiscal risk remains

The bank warned that rising government borrowing could threaten the currency’s outlook. “The principal risk to the outlook is from the fiscal side,” Deutsche Bank said.

It pointed to the Debt Management Office’s bond issuance calendar for the fourth quarter. The calendar signals “elevated issuance levels”. Deutsche Bank expects government spending to increase ahead of Nigeria’s January elections. It sees “less risk from the elections themselves”.

Naira among top performers

The naira has appreciated by nearly eight per cent against the dollar this year. That ranks 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. Bloomberg reported that both rank among the strongest performers globally.

Africa FX monitor

Deutsche Bank’s frontier foreign exchange monitor also tracks Angola’s kwanza and Ghana’s cedi. The bank said the three African economies had performed well this year despite the economic fallout from the conflict in the Middle East.

According to the lender, higher crude oil prices have strengthened the current-account positions of Nigeria and Angola. It also referenced rising gold prices. Deutsche Bank cited high real interest rates and ample foreign exchange reserves as factors supporting investor inflows into the three economies.

For Nigeria, the note paints a supportive near-term picture for the naira. But the fiscal warning puts the focus on government borrowing and bond issuance as the main risk to the currency’s recent gains.