Deutsche Bank AG says it has added Nigeria to its frontier foreign exchange monitor, saying the naira is undervalued and could strengthen further against the dollar.
According to Bloomberg, the German lender, in a client note on Monday, said the currency offers attractive carry and favourable real interest rates, which it considers supportive of its outlook.
The bank warned, however, that increased government borrowing could pose a risk to the naira’s prospects.
“The principal risk to the outlook is from the fiscal side,” Deutsche Bank said.
The lender pointed to the Debt Management Office’s (DMO) bond issuance calendar for the fourth quarter, which signals “elevated issuance levels”.
Deutsche Bank said it expects fiscal spending to rise ahead of Nigeria’s January elections but sees “less risk from the elections themselves”.
The naira has appreciated nearly 8 percent against the dollar this year, placing it among the 10 best-performing currencies out of 144 tracked by Bloomberg.
The publication also said the currency’s gains have also supported returns on Nigerian equities and local-currency bonds, which rank among the highest-performing globally.
Deutsche Bank’s frontier FX monitor also tracks Angola’s kwanza and Ghana’s cedi.
The bank said the three African economies had performed well this year despite the fallout from the conflict in the Middle East.
The Frankfurt-based lender said higher crude oil prices have supported the current-account positions of Nigeria and Angola, while firmer gold prices have benefited Ghana.
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Deutsche Bank also cited high real interest rates and ample foreign exchange reserves as factors supporting investor inflows into the three economies.
