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Telegraph – Rising FX shield Nigeria from U.S. rate hike

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Telegraph – Rising FX shield Nigeria from U.S. rate hike

Contrary to speculation in some quarters, last Wednesday’s decision by the United States’ Federal Reserves to hike interest rates will have no significant impact on an emerging market such as Nigeria due to the country’s healthy foreign exchange reserves, New Telegraph’s investigations have shown.

As was widely expected, the U.S. Fed, at its meeting last Wednesday, raised interest rates for the sixth time since it began raising rates off near-zero in December 2015. It increased its benchmark interest rate by 0.25 per cent thereby putting the rate at a range between 1.5 per cent and 1.75 per cent.

Financial experts point out that a U.S. rate hike often means a stronger dollar, which tends to depress the values of emerging market currencies in addition to triggering capital flight from these countries as investors re-balance their portfolios by holding more US investments as a hedge.

However, analysts argue that with foreign exchange reserves surging to a five year high due to high oil prices and successful Eurobond sales, Nigeria will not be affected by the US rate hike as it has adequate buffers to defend the naira even if it records a decline in Foreign Portfolio Investment (FPI).

Latest figures obtained by the Central Bank of Nigeria (CBN) show that the nation’s external reserves hit a five year high of $46billion on March 10, indicating that the reserves increased by about $3.2 billion between February and March 10 this year. The reserves stood at $39.3billion in early January 2018.

Interestingly, the CBN’s Acting Director, Corporate Communications Department, Isaac Okorafor, attributed the continued accretion to the reserves to the apex bank’s effort at vigorously discouraging unnecessary importation and reducing the nation’s import bill; inflow from oil and non-oil exports, as well as the huge inflows through the Investors and Exporters (I&E) window of the foreign exchange market, which he said had attracted over $33billion since April 2017, when it was created.

 

Commenting on the likely impact of the US rate hike on Nigeria, Lagos-based financial advisory firm, Financial Derivatives Company Ltd (FDC), had in a report late last month predicted that an increase in U.S. interest rates will only have a minimal impact on the exchange rate of the naira.

The firm had stated at the time: “There are indications that the US Fed will hike interest rates this year (which may trigger capital flight from Nigeria). Given that hot money is interest rate sensitive, the combination of these events may trigger a reversal in capital flows. “However, with the external reserves approaching $41 billion and if there are no shocks to oil price and production, the exchange rate effect should be minimal.”

Corroborating the FDC, analysts at FSDH Merchant Bank pointed out that despite the Fed Rate increase in last December, there was increased capital flow from foreign investors into the Nigerian economy in Q1 2017, contrary to concerns that tightening by the U.S. could bring about currency instability in emerging markets such as Nigeria, as foreign portfolio investors may redirect investments towards the American Government’s Treasury Notes.

 

The analysts stated: “The Nigerian fixed income market offers attractive yields that will pull foreign capital inflows and help to further strengthen the value of the naira. However, a negative shock to the level of oil production and oil price remain critical downside risks to the positive economic outlook for the Nigerian economy.”

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