Rising US Interest Rates Threaten Capital Flows into Nigeria
Financial and economic experts have said the return of Foreign Portfolio Investors to Nigeria is being threatened by the rising interest rates in the United States. Last week, the National Bureau of Statistics said the first quarter of this year saw a continuous growth in total capital importation into Nigeria, the fourth consecutive quarterly increase since the second quarter of 2017.
It said the total value of capital imported in the quarter increased by 594.03 per cent year-on-year to $6.303Bn, adding that the increase was driven mainly by portfolio investment, which accounted for 72.42 per cent of the total capital inflow into the country.
Portfolio investment, which stood at $4.565Mn in the first quarter, grew by 1,355.66 per cent and 31.27 per cent compared to the first and fourth quarters of 2017, respectively. The NBS said the strong growth in portfolio investment was mainly due to the increase in money market instruments.
The Nation saw an exodus of foreign investors after the steep fall in the price of crude Oil from mid-2014 triggered a currency crisis and the first recession in 25 years. But the total value of capital imported into the country rose in the third quarter of last year, for the first time since the fourth quarter of 2015, following the emergence of the economy from recession in the second quarter of last year. The rise was driven by portfolio and other investments.
“Rising US interest rates and the consequent narrowing of the interest rate differentials with Nigeria, where yields on sovereign securities are falling, pose a threat to the resurgence of portfolio inflows into Nigeria,” an Associate Professor and member of the faculty at the Lagos Business School, Dr. Doyin Salami, said.
The US Federal Reserve raised the federal funds rate, its benchmark interest rate, by a quarter point to a range of 1.5 to 1.75 per cent during its March 2018 meeting. It was the sixth rate hike since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015.
This month, the Fed held interest rates steady at the conclusion of its meeting, but economists have overwhelmingly predicted that it will next raise rates in June. Some analysts expect four total rate increases this year, given the strength of the economy, including a historically low unemployment rate, according to The New York Times.
KPMG Nigeria, in its Top 10 Business Risks in 2018/19 report, noted that the introduction of the importers and exporters window in the Foreign Exchange market last year by the Central Bank of Nigeria encouraged the return of portfolio investors to the Nigerian market. It said the CBN’s commitment to curtailing inflation and maintaining stability of exchange rates suggested that it would be mindful of the inflationary impact of the elections as well as election-related reversals in capital flows.
“Also, the rising international interest rates (led by tightening monetary policy in the United States) and narrower differentials between domestic and international interest rates already reduce the incentive for portfolio inflows into Nigeria. In light of the above factors, it is expected that the CBN may choose to maintain high policy rates,” the financial services firm stated.
According to Salami, the return of portfolio investors to Nigeria reflects the preponderance, so far, of the ‘pull factor’ – the Investors and Exporters’ Window – over the ‘push factor’, the differential between domestic and international interest rates. The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, is of the view that the US Federal Reserve will increase interest rates in June.
He said, “The US interest rates have been increasing and the interest rate differential is not in our favour. When the interest rates in the US increase, the Dollar becomes stronger. When the Dollar is stronger, the price of Oil will come down. So, there will be additional pressure of reversal of capital flows that came into Nigeria.
“It is a potential risk but the Oil price has risen significantly in recent times; so, we are in a good place. But if Oil prices come down, interest rates in the US go up, and capital begins to flow out of Nigeria, then we will have to deal with that pressure.” Foreign transactions at the Nation’s bourse reduced by 7.32 per cent from N132.21Bn in March to N122.53Bn in April, data released by the Nigerian Stock Exchange on Friday, 18th of May 2018 showed.
The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, also noted that rising interest rates in the US had negatively affected some countries without “the kind of yield environment that we have.”
The Global Chief Economist, RenCap, Charles Robertson, said, “Rising US interests will add to Nigeria’s borrowing costs, unless US rates are rising because of strong economic growth, which lifts Oil prices and would then reduce Nigeria risk.”