US Interest rates raise mount Pressure on Nigeria’s Foreign Reserve, Naira

Plans by the United States (US) to raise interest rate would further devalue Nigeria’ currency, the naira and mount pressure on foreign reserves, analysts have said.

San Francisco Fed President John Williams said on Thursday that the Fed was likely to raise interest rates later this year, adding that he expects above-trend U.S. growth for the rest of 2015 after a weak first quarter.

Responding to questions by reporters in Singapore about the possible timing of a U.S. rate hike, Williams said the subject is “on the table” at every meeting of the Federal Open Market Committee, whether the next one which holds from June 16-17 or later ones.

Reuters quoted Williams as saying “We’re going to be…likely raising interest rates later this year, raising them gradually over the next few years,” during a Q&A session with the audience after delivering a speech at a symposium.

Reacting to the development, John Coppock, financial journalist and investment writer for the Dutch asset management group, Robeco said a U.S. rate rise would be bad for the Nigerian economy as it would raise the value of the dollar, which would further devalue the naira and put pressure on Nigerian foreign currency reserves.

“The dollar would appreciate, making it harder to finance the Nigerian economy or banking system with foreign reserves (i.e. Dollar reserves)”, he said in an emailed response to BusinessDay.

Tajudeen Ibrahim, Head, Equity Research at Chapel Hill Denham Securities Limited said the proposed interest rate hike by the US Fed is negative for the Nigerian financial markets, as it reduces the chances of increased foreign portfolio inflows to Nigeria.

“Nonetheless, we could see limited negative impact if yields on NGN bonds rise beyond current levels and corporate earnings are robust, amid fairly stable USD/NGN”, Ibrahim said in an emailed response to BusinessDay.

Responding to the challenges faced by Nigeria in terms of dwindling revenue as a result of oil price fall, Coppock told BusinessDay by email at the ongoing FirstBank of Nigeria training holding at Press Association London, that the long-term solution is for Nigeria (and other emerging markets dependent on dollar earnings) to reduce their reliance on oil.

“The economy needs rebalancing in favour of internal consumption, services and SMEs. That’s what China is doing and it’s working”, he said in an e-mail response.

Williams was in Singapore for a symposium on Asian banking and finance, co-hosted by the Monetary Authority of Singapore and the Federal Reserve Bank of San Francisco.

In a speech at the symposium, Wiliams went into a simmering global debate over how best to protect against future financial crises, arguing that interest rate hikes are not the answer, even as a last resort.

“Despite the clear need to consider all potential tools to avoid a financial crisis, I am unconvinced that monetary policy is one of them,” he said.

In his response, Ayodeji Ebo, head investment research, Afrinvest Securities limited, said, “The eventual raise in interest rate by the US Fed may lead to a slowdown in capital inflows to the Nigerian capital market and economy as a whole. In addition, foreign investors may reduce their current exposure to Nigeria and emerging economies, by selling down on their portfolios to take advantage of the higher interest rate in the US.

“This will ultimately compound the pressure on the naira and increase the rate of depletion of the Nigeria’s external reserves. The hike in interest rate may be more telling on the Nigerian economy, based on the level of the current external reserves (US$29.6bn) which barely covers five months of imports.

“In our view, we sense that foreign portfolio investors may have factored the potential capital inflow reversals into the pricing of financial assets, hence the effect may not be too significant on the prices of financial assets. With the high expectations from the new government (the Buhari administration), strong policies that support capital importation and economic growth may douse the effect of any capital inflow reversals in the medium term.”

Olutola Oni, analyst at WSTC Financial Services limited, said: “We expect an eventual increase in interest rates by the US Fed to affect the Nigerian economy and the local currency, primarily through the financial markets. We believe the increase in US rates will make foreign investors demand higher returns to hold Nigerian assets. “We reckon that the need to sustain capital inflow amid this scenario will, all other things being equal, compel the CBN to maintain its high MPR regime in order to retain the relative attractiveness of Nigerian fixed income securities on risk-adjusted basis.

Speaking further, Oni said, “However, we do not expect the consequence (of the increase in rates by the Fed) on the Nigerian markets to be as significant as that of June 2013 when the US Fed first announced its intention to commence the tapering of its quantitative easing programme.

“We believe the termination of the US QE programme and the oil price crash have substantially reduced the size of foreign capital inflows, and consequently, the vulnerability of the Nigerian financial markets to external shocks. Also, we believe that unlike in June 2013, institutional investors would have to some extent priced an eventual increase in rates into Nigerian assets”.

HOPE MOSES-ASHIKE Report.