7 March 2024 | 7:03PM GMT

CEEMEA in Focus

Nigeria — Turning the Corner

n Nigeria is finally emerging from a period of monetary policy transition Andrew Matheny
+44(20)7051-6069 |
characterised by an absence of a credible policy anchor and deeply negative real [email protected]
Goldman Sachs International
interest rates. This has implied a volatile and sharp depreciation of the Naira in
Bojosi Morule
recent months and a cumulative 60-70% weakening of the currency over the +44(20)7051-0851 |
[email protected]
past nine months. Goldman Sachs International

n The policy shift – catalysed by the MPC decision and central bank bill auction last
week that brought effective interest rates to 27% – is still tentative, given the
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new team’s limited track record and ex ante real rates that are now positive but
still do not compare favourably to elsewhere (notably Egypt).
n Nevertheless, given a combination of positive real rates, (limited) capital inflows,
and evidence of a shift to a more orthodox policy set-up, we think that Nigeria is
turning the corner following its recent currency crisis.
n These developments have prompted us to shift to a constructive outlook for the
Naira, which our FX strategists expect to appreciate to NGN 1200 vs. the USD in
12 months. In addition, we advocate for a bull-steepening of the Eurobond
curve, as external liquidity concerns diminish.
n That said, the policy steps implemented to date are only a first step in the right
direction, and we think more follow-through is required to achieve a durable
macro stabilisation. The main risk to our more constructive outlook is that the

7561885274ef43e39d5031b64d551600
authorities do not follow through on the shift to a more orthodox monetary
set-up that they have articulated and do not tighten policy appropriately to attract
the capital inflows required to ease fiscal and external financing constraints.

Investors should consider this report as only a single factor in making their investment decision. For Reg AC
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 Goldman Sachs CEEMEA in Focus

Nigeria — Turning the Corner

We take stock of recent developments and policy adjustments in Nigeria, arguing that
the monetary policy transition announced by the new CBN leadership team last fall is
finally beginning to gain some momentum. With real rates that are now in positive
territory and limited capital inflows, we shift to a constructive outlook on the Naira and
argue for a bull-steepening of the Eurobond curve.

An Incomplete Monetary Policy Transition Undermined the Naira in

Recent Months
In our view, the most notable change to economic policy announced by Nigerian
President Bola Tinubu in his inauguration speech was to the conduct of monetary policy,
which he described as needing a “thorough housecleaning”. Following the dismissal of
the previous CBN Governor, who had presided during former President Buhari’s two
terms in office, Tinubu appointed new leadership at the CBN in September 2023 that
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signaled a shift to a more orthodox policy set-up. While we think the new team’s
communication – including guidance for a transition to inflation targeting and flexible
exchange rate, greater transparency and a more arms-length relationship with the fiscal
authorities – was welcome, it was not accompanied by sufficient policy actions until last
week. Instead, we argued in December that the CBN’s new leadership had abandoned
their previous policy anchor (the fixed exchange rate) without announcing the new one
(an inflation target) or articulating the strategy or tools to achieve the new price stability
objective.

This left the newly flexible Naira unanchored and – in the presence of ongoing
monetisation of the fiscal deficit – contributed to an increase in inflation to 30%yoy as of
January, as well as a sharp currency depreciation, likely in turn to imply a further rise in
inflation in the months ahead. We argued at the time that two elements were needed

7561885274ef43e39d5031b64d551600
to stem the escalating confidence and currency crisis: 1) positive real interest rates; and
2) sizeable external financing. Until last week, the Nigerian monetary authorities did not
offer the former and (perhaps as a result) the rest of the world did not provide the latter,
resulting in the 60-70% currency depreciation that has taken place over the past nine
months since President Tinubu assumed office.

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 Goldman Sachs CEEMEA in Focus

Exhibit 1: Policy Rate was Historically not Binding for Market Rates
(*) denotes 30d moving average

30 % % 30
policy rate

3m deposit rate

3m T-Bill*
25 25
3m interbank*

3m NDF-implied yield*

20 20

15 15

10 10
For the exclusive use of [email protected]

5 5

0 0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Source: Bloomberg, Haver Analytics, Goldman Sachs Global Investment Research

Recent Announcements Finally Signal a Policy Shift

Last week, the CBN held its first MPC meeting in six months in the context of the
ongoing currency crisis. MPC meetings in Nigeria historically did not carry significant

7561885274ef43e39d5031b64d551600
market relevance, given that the CBN in the past operated a quantity-based monetary
policy set-up, whereby it conducted operations to adjust liquidity as a function of
pressures on the (highly managed) currency. As such, interest rates were never a policy
instrument and the CBN’s monetary policy rate and interest rate corridor historically
were not binding for market rates. In recent years, market rates have stood significantly
below the policy rate on account of excess liquidity in the banking system and central
bank monetisation of the fiscal deficit. As we argued in the run-up to last week’s MPC
meeting, this impaired the monetary policy transmission mechanism and made a strong
case for the CBN to announce for measures to improve this.

Last week, the CBN announced an increase in its monetary policy rate (MPR) from
18.75% to 22.75% (above consensus expectations for a 250bp rate increase) but
accompanied by a widening of its rate corridor from -300/+100bp to -700/+100bp,
effectively leaving the lower bound of the corridor (the Bank’s standing deposit facility)
unchanged at 15.75%. Additionally, it raised its cash reserve ratio (CRR) requirement
sharply from 32.5% to 45%, thereby signaling a withdrawal of liquidity from the banking
system. Finally, it announced an ad hoc auction for central bank open-market operation
(OMO) bills on Friday, in which it issued NGN1trn (US$625mn) of 12mn paper at an

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 Goldman Sachs CEEMEA in Focus

effective yield of 27%. According to comments from the CBN, foreign participation
stood at 80%. This auction was followed by a regularly scheduled T-bill auction
yesterday (March 6), in which a similar amount of 12mn bills were issued at a similar
effective yield.

The CBN’s policy rate and corridor themselves are still not binding for market rates, with
many (especially short-dated) rates remaining well below, but with the 12mn bill rates
now having risen somewhat above the upper end of the corridor. As such, the policy
set-up implies that the CBN still retains significant discretion over managing liquidity and
over effective interest rates. For this reason, we put more weight on the increase in the
CRR (which clearly signals a tightening of liquidity) and on the OMO and T-bill auctions
(that indicate the authorities’ preference for rates above 25% and some degree of
fiscal-monetary coordination) than on the policy rate and corridor adjustments
themselves, which we interpret as having mostly a signaling effect.

Moreover, CBN communication last week guided for the need for positive ex ante real
interest rates (relative to their end-year forecast of 21.4%) and indicated a willingness to
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tighten further (if required) and adjust other policy and macro-prudential parameters at
the next MPC meeting (scheduled for late March). This includes the rate corridor and
the CBN’s minimum loan-to-deposit requirement for banks (which sends mixed
messages and may introduce distortions in the context of a tightening of monetary
policy). Given that the CBN’s policy approach has maintained its policy
flexibility/discretion, it will therefore rely on establishing credibility by building
consistency and a track record. Thus, investors will likely look for further confirmation of
rates in the 25-30% range that we think is required relative to the current inflation
outlook before they are convinced by the narrative of currency stability and a
re-anchoring of inflation expectations.

7561885274ef43e39d5031b64d551600

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 Goldman Sachs CEEMEA in Focus

Exhibit 2: Nigeria ex ante real rates have moved into positive territory
EM: BRL, CLP, COP, CNY, CZK, HUF, IDR, ILS, INR, MXN, MYR, PEN, PHP, PLN, THB, TWD, ZAR; Frontier: ARS, CRC,
DOP, KZT, SAR, UAH, UYU.

ex-ante real rate (%) ex-ante real rate (%)

15 15

10 10

5 5

0 0

-5 EM/Frontier Interquartile Range -5

EM/Frontier Median

Nigeria
-10 -10
Egypt
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-15 -15
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24

Source: Bloomberg, Consensus Economics, Haver Analytics, Goldman Sachs Global Investment Research

A More Constructive Outlook for the Naira and Nigerian Credit

We argued that addressing Nigeria’s currency and external liquidity crisis required
positive real interest rates and capital inflows, conditions that were both present – at
least in a limited form – for the first time last week on the back of the central bank’s
monetary policy adjustments and bill issuance. In our view, this is the cue to turn
constructive on the FX outlook, even if more decisive rate increases and confirmation of
the policy shift are likely required to attract meaningful foreign inflows. This is especially

7561885274ef43e39d5031b64d551600
the case given that, in the near term, inflation on our estimates is likely to rise further on
the back of lagged currency depreciation, and given that real interest rates are still
comparatively low relative to elsewhere (most notably Egypt, which is likely to be a
beneficiary of large inflows on the back of recent policy adjustments). We think the
Naira looks cheap on a REER basis in a historical context (Exhibit 3). Added to this, the
current account surplus was +3.5% of GDP in 2023Q3, and we expect it to increase
above +5.0% on the recent FX moves and associated import compression. We thus see
reason for the Naira to be undervalued, and we see it appreciating to 1200 within the
next 12 months.

With respect to credit, the eurobond curve is still comparatively flat, in our view pricing
in ongoing external liquidity risks. With a current account surplus that is now likely in
excess of 5% of GDP (at least on a temporary basis) and with a (long-awaited) shift in
monetary policy to a more appropriate setting, we see scope for a bull-steepening of
the credit curve, likely also to be supported by eurobond issuance expected in Q2.

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 Goldman Sachs CEEMEA in Focus

Exhibit 3: The Naira Has Cheapened Considerably on a REER Basis

Real Effective Exchange Rates

160 160

140 140

120 120

100 100

80 80

60 60

40 Egypt REER 40
Nigeria REER
20 Nigeria average, '97-'24 20
Egypt average, '97-'24

0 0
1998
1999
2000
2001

2003
2004
2005
2006

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

2019
2020
2021
2022

2024
2025
1997

2002

2007

2018

2023
For the exclusive use of [email protected]

Source: Haver Analytics, Goldman Sachs Global Investment Research

Andrew Matheny

7561885274ef43e39d5031b64d551600

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 Goldman Sachs CEEMEA in Focus

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