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Naira faces further pressure as US rate hike looms

By on June 10, 2015

The naira and the Nigerian stock market, which have taken a pinch from the fall in global crude oil prices, are further threatened as the United States looks set to raise its interest rate.

The US Federal Reserve had in March said it was giving “serious consideration” to lifting its rates later this year.

Industry experts, who spoke with our correspondent, said the imminent hike in the US interest rate would prompt investors to move their capital from Nigeria and other emerging markets to the US, further rocking the naira.

A Macroeconomic and Fixed Income Research Analyst at FBN Capital, Chinwendu Egwim, said, “We expect a hike in rates no earlier than the third quarter of 2015,” adding that the US Fed funds target range had been maintained at zero and 0.25 per cent.

On the likely implications for Nigeria, she said, “The naira is likely to come under some additional pressure because this move will make frontier markets in general 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.”

The Head, Economic Research, Ecobank, Angus Downie, 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 Head, Investment and Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said 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.”

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.

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 dollar 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.”

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.

For Ebo, it is unlikely that the CBN will increase interest rate.

The Director, Corporate Communications, CBN, Mr. Ibrahim Muazu, told our correspondent that certain things had been done to manage the impact of the US rate hike.

 

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