Nigeria Elevated Risk, AS Economic Storms from US to China

Nigeria is currently facing elevated risks to its economy from the twin prospects of a rate hike in the United States (U.S) and further slowdown in Chinese economic output.

A U.S Federal Reserve (Fed) rate rise is likely to exacerbate global financial market volatility and add to currency pressures in Sub Sahara Africa, according to Bismarck Rewane, CEO of consulting firm Financial Derivatives Company (FDC).

 

“An interest rate hike in developed economies will trigger capital flow reversals from emerging economies such as Nigeria,” Rewane said in a presentation he made at the Lagos Business School.

“A slowdown in economic activities in China will impact negatively on the external balance of economies such as Nigeria.”

Easy credit from the U.S Fed and robust Chinese growth in the past decade had combined to drive investment dollars into emerging markets like Nigeria, bulking up currencies and driving commodity prices higher.

In China, there are however now signs of economic weakening, which is pulling commodity prices down, and hawkish comments from Fed Bank of Atlanta President, Dennis Lockhart last Tuesday, and a strong report on U.S. service-sector growth Wednesday morning, has increased chances of an interest-rate increase next month, according to bond traders.

The dollar (USD) is expected to continue its rise when the U.S rates inch up, which is especially problematic for Nigeria, as the government relies on crude exports for about 70 percent of its income and 95 percent of foreign exchange earnings.

A stronger dollar often pushes down prices of commodities and vice versa. Oil prices are down more than 50 percent in the past year, as Brent crude slipped a further 0.6 percent to $49.22 a barrel in early Friday trading, down 5.7 percent for last week.

A U.S Federal Reserve gauge of the inflation-adjusted dollar exchange rate against major U.S. trading partners shows the greenback has so far gained 17 percent from an all-time low in July 2011.

In the previous two dollar-rising cycles, the currency gained 53 percent from 1978 to 1985, and then 34 percent in the seven years through 2002, according to data from Bloomberg.

This suggests the dollar has further to rise.

The market is largely underweight naira (NGN) bonds at present, given significant outflows in late 2014 and early 2015, according to Samir Gadio, Head, Africa Strategy and FICC Research, at Standard Chartered Bank, London.

“The overwhelming majority of investors, however, are still waiting for USD-NGN to move higher to a more sustainable level and for FX liquidity metrics to improve,” Gadio said.

Nigeria’s currency, the naira, has fallen 17 percent against the dollar in the past year as the Central Bank was forced to devalue the currency to protect dollar reserves.

The country’s trade with China accounted for 23 percent of all foreign trade in 2014, meaning Africa’s largest economy is vulnerable to a slowdown in the world’s second largest economy.

GDP Growth in Nigeria should slow to 3.5 percent in 2015 from an average of 6 percent per annum over the last six years, according to FDCs Rewane.

The Nigerian Stock Exchange Index has fallen 9.2 per cent this year, as some foreign investors trimmed holdings.

Net foreign outflows from Nigerian stocks however slowed to N18.19 billion this year to June, figures from the stock exchange show.

Portfolio Managers (PMs) and funds tracking the Nigerian market might react differently to a U.S rate increase, Abiodun Keripe ,the Lagos based head of research at Elixir Investment Partners, says.

“PMs and funds that are locked-in for a particular time horizon will most likely not be rebalanced, while those seeking just short-term gains might see some rebalancing. In all, we do not see more fund outflow, rather as naira further stabilises and the broad macroeconomic picture brightens, some of these foreign funds will come back into the system.”

PATRICK ATUANYA