ZERO EQUILIBRIUM'S NAIRA OUTLOOK 2025


By Chinedu Okoye 

Naira has experienced a massive decline in the past year, since the devaluation of the currency following the float. The Naira has experienced consistent pressures since the brief relief in May where it edged towards the N1200/$ levels.


However even with the "marked increase" in reserves since the February article, the Naira has struggled under the reliance on a narrow export base, shorterm and variable income sources.

There are fundamental reasons why the Naira should be trading at current levels that are nuanced at the surface. We present our outlook on Naira performance against the USD, employing the use of broad technical and fundamental indicators that inform our perspective.


Technical Indicators:

• BDC -NAFEM Spread: Widened spreads accompanied by a depreciation on the average would imply a higher USD bid in both markets exerting downward pressure on the Naira at the BDC rates which spills over to the NAFEX rates.
• The BDC -NAFEM Average would give a a better view on market sentiments and help gauge the pressure on the currency.
FX Turnover: Indicates how much USD is traded in the NAFEM periodically. An increase in FX turnover is usually accompanied by an increase in the local currency. 

Analysis:

The NAFEM Rates have remained weak at the N1600/$1 level for three months straight as the chart below shows (USD/NGN in light blue), indicating heavy pressure on the Naira and prompting the Apex Bank to intervene directly.
(Naira Exchange Rate September - November 


The current average has increased from N1665/$1 in late October to N1697. However spreads have tightened from 8.1% to 2.17% in the two week period. The spread widening in October was followed by a depreciation in the NAFEM Rates. 

(One month USD/NGN BDC Rates)

Although FX turnover increased 74% in H1 2024 (from H1 2023), this hasn't translated to strenght as even the BDC rates which led the spread remains fairly unchanged, weakening to N1700/$1 from a may high of N1300/$1.



Fundamental Indicators:


• Central Bank Foreign Reserves: Up by approximately a fifth (20%), to $40 billion Gross (see chart below) and  jusr under (liquid).
• Net FX Inflows: Came in at $25.4 billion in H1 2024, a 55% increase from the same period last year. 
• Diasporan Remittances: Also up by almost half (48.1%) in the first six months of the year at $2.34 billion from $1.58 billion from last year.
• Exports: Oil makes up 80% of the country's export, and has stayed consistently below 1.5/mbpd throughout the year. Non Oil exports haven't grown much either.

(FX Reserves 30-Day Moving Average: CBN)

Despite the increase in FX Flows, the Naira has struggled to appreciate, as whilst the fundamental indicators should indicate strenght, the Naira has weakened at both markets, explaining the movement in Naria spread and averages.


Naira By Technical and Fundamentals:

The Naira has stayed below our subjective fair value of N1500/$1 moving lower and currently at N1715.32/$1 at the parallel market and N1678.87/$1. This makes for a Spread of N36.45 (or 2.17%).

Going by our last year projections Naira should be rrading closer to its N1200/$1 "fair value" as assumed then. However in March we adjusted to N1500/$1 as fair value and N1760/$ as an expected longer-term rate. In recognition of headwinds facing the Nigerian local currency with regard fundamental. This adjustment holds as Naira has been stuck between N1600-N1700/$1. 

The structural issues behind the underperformance of these core fundamental FX components have made for a negative sentiment and surrounding the Naira hence the decine in both NAFEM and Parallel Markets rates.

As the chart below would indicate,  there has been a steady reduction in the volume of Oil exports, which have declined since 2020 and remain currently below pre pandemic levels.

(Quarterly Oil Exports: Source Statistita)

Efficiency Gains Under the Current System:

The current model of exchange rate policy (willing buyer willing seller) guarantees market pricing efficiency and could build up reserves, even as the local currency stays weak or declines. The unification of rates (below 5% spread) shows an improvement in the efficiency of distribution and transparency.

An improvement in FDI and Exports (or overall trade balance is essential for any meaningful long term appreciation of the Naira. 


Naira Outlook: November 2025

Based on the above, the one year outlook for the Naira remains at N1500/$1 (+/-10%). This represents our base case scenario for the Naira barring a significant change in FDI and Oil production – the latter is the low hanging fruit or quickest way to improve FX supply.

Below we outline factors that could keep Naira within range:

Demand for Yields:
Lower rates in advanced countries (Europe, US, China), and the sense  a risk off sentiment in markets –as stocks and Crypto stay bid – could be accompanied by a strong demand for high yields. This could be bullish for both frontier and emerging market sovereigns with a stable economic outlook. 

Whilst this is good for the Naira, it also comes with high FX demand for servicing external debt obligations and low a potential market glut, upon maturity. Over 75% of bids for Nigeria's government securities in March 2024, were from foreign investors. As of Q2 2023, the figure was 38.05%. 

Risk Premium:
The market is fully aware of this and this making a cautious bid on the Naira. Thus, the current levels can be defined as a premium on the USD. As Naira assets are exposed to; Inflation, Insolvency, Exchange Rate risks, and there would be periodic Naira supply glut by investors repatriating capital.

Base Case Scenario:

Barring a change in these 'core' FX supply components (Oil and other exports), or significant improvement in key industries (Oil, Agriculture, most especially and good and energy are the key drivers of inflation).

The Naira is set to remain around N1500/$1 (+/-20%). Though there could be periodic strengthening and weakening around the range. As the demand for yields is offset by structural issues stunting industrial development, oil and non-oil exports. 

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