US Federation’s Rate Hike May Affect Portfolio Investments In Nigeria

As inflation rate trends towards the single digit target of the Central Bank of Nigeria (CBN), analysts believe it will not be enough to instigate a rate cut by the Monetary Policy Committee (MPC) as happenings in the global community may spike a reversal of portfolio investments.

MPC members at the last meeting held in May had cited inflationary pressures triggered by budget implementation as some of the reasons benchmark interest rate was not cut. However with the Federal Reserve Bank of the United States hike in interest rate, experts said foreign portfolio investors may begin to trickle out of the Nigerian economy.

The US Fed had last week hiked its key interest rate, for the second time this year, by 25 basis points to a range of 1.75 to two per cent penciling two more rate hikes before the end of the year in line with market expectations. Nigeria’s inflation rate has been on a steady decline dropping to a 26 month low of 11.61 per cent in May from 12.48 per cent in April, although month on month inflation was up by 1.09 per cent on the back of spike in food prices, driven by a confluence of factors- Ramadan fast, planting season shortages and increased logistics cost.

While inflation is expected to continue to drop, analysts believe that the MPC will continue to hold rates so as to keep the Nigerian market attractive to foreign investors. According to analyst at Afrinvest West Africa Limited, a rate cut by the MPC at the July 2018 meeting may not be feasible.

“Regardless of our prognosis of continuous disinflationary trend and the recent moderation in market rates, most notably, Treasury bills and bond yields, we are of the view that the call for monetary policy rate cut may still not be actioned by the MPC at the July 2018 meeting. Our belief is that the argument to keep Nigerian assets attractive in the face of possible massive outflow of “Hot Money” in H2, amid the rising interest rate environment in the US (plus a stronger dollar) as well as anticipation of increased tensions in the build up to 2019 General Elections, will preponderantly supersede.

“In addition, the expected surge in fiscal spending post-presidential assent to the 2018 Appropriation Act makes the possibility of a rate cut slim. Nonetheless, we expect fixed income market rates to continue trending lower as the FGN continues to implement its debt strategy geared towards reducing the proportion of domestic borrowing for increased foreign debt.”

Meanwhile, the CBN says it is prepared to withstand any outflow that may hit the system promising to continue to defend the naira. The apex bank has consistently intervened in the foreign exchange market, further liberalizing and increasing liquidity in the forex market. It recently increased its sales of foreign exchange to licensed Bureau de Change operators to $60,000 broken into three times a week sales from $40,000. It also made it easy for individuals to walk into any bank to obtain foreign exchange.

The foreign exchange reserves of the country has risen by 22.4 per cent in the course of the year rising from $38.91 billion it was at the beginning of the year to $47.62 billion as at June 13, 2018.

CBN director, Banking Supervision, Mr Ahmad Abdullahi had noted that the external reserves of the country has grown to $48 billion. Abdullahi noted that despite the mixed signals in the economy, the CBN remains confident of being able to continue to defend the naira. He noted that in the face of a rise in US Fed’s rates, global trade war and a cut in tax by the United States government and its attendant effect which may include outflow of capital form the Nigerian economy, “the CBN is prepared for any outflow.” This assurance was also given by the managing director of United Bank for Africa (UBA) Kennedy Uzoka, who said “regardless of the messages that we are getting from abroad that things are getting in the reverse but Nigeria with the good work of the CBN has been able to manage it and we are now in a good position to manage the forex market development.