By Iroyin Yoruba Television
LAGOS, NIGERIA — Deutsche Bank has added Nigeria to its frontier foreign-exchange monitor, signalling a more positive outlook for the naira while warning that rising government borrowing could undermine the currency’s recent gains.
The German financial institution said the naira appeared undervalued and offered attractive opportunities for investors because of favourable interest-rate conditions. However, the bank cautioned that fiscal pressures could become a major risk if government borrowing and spending increase substantially.
The development comes after the naira strengthened by nearly eight per cent against the US dollar in 2026, placing it among the 10 best-performing currencies out of 144 tracked by Bloomberg, according to the available report.
The bank’s assessment highlights the competing forces affecting Nigeria’s currency: improved foreign-exchange conditions and attractive domestic investment returns on one side, and government financing requirements on the other.
WHY DEUTSCHE BANK SEES POTENTIAL IN THE NAIRA
Deutsche Bank’s outlook is partly based on the returns available from naira-denominated investments.
Investors who purchase Nigerian government securities or other local-currency assets may benefit from relatively high interest rates. If the naira also strengthens against the dollar, overseas investors could receive an additional benefit when converting their investment returns back into their home currency.
This strategy is commonly known as a carry trade. It involves taking advantage of differences in interest rates between currencies, although exchange-rate movements can reduce or eliminate the gains.
A currency considered undervalued may also attract investors who believe its market price could rise towards a level better reflecting its economic conditions.
However, the bank’s assessment is a market outlook, not a guarantee that the naira will continue appreciating. Investors must still consider inflation, currency liquidity, government borrowing and changes in international financial conditions.
GOVERNMENT BORROWING IDENTIFIED AS A MAJOR RISK
Despite its positive view of the currency, Deutsche Bank identified Nigeria’s fiscal position as a principal concern.
The bank pointed to the Debt Management Office’s fourth-quarter bond issuance calendar, which it said indicated elevated borrowing requirements.
Government borrowing can influence the currency through several channels. Heavy issuance of domestic debt may affect interest rates, compete for available investment funds and increase the government’s future debt-servicing obligations.
The bank also expects government spending to rise ahead of Nigeria’s January elections, although it sees less risk arising directly from the elections themselves.
The concern is whether additional borrowing and spending could weaken confidence in the naira or place pressure on the country’s fiscal position.
The bank’s warning does not mean that the naira must depreciate. Rather, it identifies government financing decisions as an important variable that could influence the currency’s future performance.
OIL REVENUE AND FOREIGN-EXCHANGE RESERVES
Nigeria’s foreign-exchange position is also influenced by receipts from crude oil exports and other sources of foreign currency.
Higher crude oil prices can improve export earnings and support the country’s external accounts, provided production volumes and other conditions allow Nigeria to benefit from the higher prices.
Foreign-exchange reserves can also help strengthen confidence in a country’s ability to meet external obligations and manage currency-market pressures.
Deutsche Bank cited favourable real interest rates and foreign-exchange reserves among the factors supporting investment inflows into Nigeria, Angola and Ghana.
The bank also tracks Angola’s kwanza and Ghana’s cedi through its frontier foreign-exchange monitor. It said higher oil prices had supported Nigeria and Angola, while firmer gold prices had benefited Ghana.
These conditions provide useful context for the bank’s assessment, but they do not remove the risks associated with Nigeria’s borrowing needs or guarantee that foreign investment will continue at the same pace.
WHAT THE OUTLOOK MEANS FOR INVESTORS AND BUSINESSES
A stronger naira can reduce the local-currency cost of some imported goods and obligations denominated in foreign currencies. It can also improve dollar-denominated returns for overseas investors holding Nigerian assets.
However, the effects vary across the economy. Importers may benefit from a more stable exchange rate, while exporters receiving foreign currency may experience different revenue outcomes when converting earnings into naira.
Businesses also need to distinguish between a favourable currency forecast and a reliable basis for long-term financial planning. Exchange rates can change quickly in response to domestic policy decisions, global market movements and shifts in investor confidence.
For foreign investors, high interest rates may be attractive, but the risk of currency depreciation remains important. If the naira weakens, losses from exchange-rate movements could outweigh the returns earned on local investments.
The sustainability of the currency’s recent performance will therefore depend on several factors, including foreign-exchange supply, inflation, monetary policy, oil receipts and the government’s borrowing requirements.
Deutsche Bank’s decision to include Nigeria in its frontier foreign-exchange monitor provides a positive signal about the bank’s assessment of the market. Its warning on fiscal risks, however, makes clear that further appreciation is not assured.
The key question for Nigeria will be whether favourable currency conditions can be maintained alongside responsible fiscal management and sustained investor confidence.