Financial experts are predicting another wave of Naira’s depreciation at the foreign exchange market, no thanks to the announcement by the United States’ Federal Reserve that it would increase interest rate. According to experts, a hike in interest rate in the US would precipitate divestment from Nigeria by foreign portfolio investors who would like to take advantage of the new rate. This would put pressure on the foreign exchange market and depreciate the value of Naira as they convert their investment into dollars. The move would also have a negative effect on the Nigerian stock market, which has taken a pinch from the fall in global crude oil prices.
According to Ayodeji Ebo, head, Investment and Research, Afrinvest West Africa Limited, the rate hike “is expected to have impact on the Nigerian capital market because the quantum of foreign investments in Nigeria is still significant (approximately 50 per cent) both in bonds and equities markets. If interest rate is raised in the US, the investors would require higher interest rate to compensate for the inherent risk in the country. And if this is not done, then you may see capital inflow reversal.”
Ebo said, “We don’t see any knee-jerk reaction like we saw in 2006 which saw significant drop in the prices of financial assets across emerging markets. So we’ll require more dollars to pay off the foreign investors, which will further increase pressure on the Central Bank of Nigeria. So, that may lead to further devaluation, which will also even affect the returns of foreign investors.”
Chikwendu Egwim, a macroeconomic and fixed income research analyst at FBN Capital, said that the expected hike in rates between July and September would bring the Naira under pressure as Nigeria and other frontier markets become less attractive to marginal offshore investors.“In addition, if this leads to LIBOR (the London inter-bank lending rate) moving up, the cost of borrowing for several Nigerian companies that have borrowed in US dollar or foreign currency will increase.”
According to Egwim, the monetary policy committee of the CBN will have to consider more tightening to offset such a move. “We may see the MPR move up in Nigeria too. Alternatively, if fiscal savings can be found, the pressure on reserves may ease, and provide an offset,” Egwim added.
Similarly, Angus Downie, Head, Economic Research, Ecobank, said bond yields would remain elevated between 14 and16 per cent. “But assuming exchange rate expectations settle, they could start to fall more quickly, although the effect of the US Federal Reserve monetary normalisation will continue to draw some investors into US Treasuries.”
The CBN had in November last year raised the Monetary Policy Rate by 100 basis points to 13 per cent from 12 per cent, and devalued the naira by 8.4 per cent.
By Dike Onwuamaeze