Deutsche Bank AG has added Nigeria to its frontier foreign exchange monitor, saying the naira is undervalued and could strengthen further against the US dollar.

According to Bloomberg, the German lender said in a client note on Monday that the naira offers attractive carry and favourable real interest rates, which support its positive outlook for the currency.

However, the bank warned 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 bond issuance calendar for the fourth quarter, which indicates elevated levels of borrowing.

Deutsche Bank also expects government spending to increase ahead of Nigeria’s January elections, although it sees less risk arising from the elections themselves.

The naira has appreciated by nearly eight per cent against the dollar this year, placing it among the 10 best-performing currencies out of 144 tracked by Bloomberg.

The currency’s gains have also supported returns on Nigerian equities and local-currency bonds, which Bloomberg reported are among the highest-performing assets globally.

Deutsche Bank’s frontier foreign exchange monitor also tracks Angola’s kwanza and Ghana’s cedi. The lender said the three African economies have performed well this year despite the effects of the conflict in the Middle East.

According to the bank, higher crude oil prices have supported the current-account positions of Nigeria and Angola, while firmer gold prices have benefited Ghana.

Deutsche Bank also identified high real interest rates and ample foreign exchange reserves as factors supporting investor inflows into the three economies.

Boluwatife Enome

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