U.S. tightening policies, de-risking put Nigeria’s economy on red alert

YeCheng2天前Military103
A global tightening of developed economies, particularly as announced by the United States Federal Reserve System and other developed countries, has raised fresh panic about Nigeria’s investment outlook with capital flight feared to worsen in coming months if not checked.

U.S. tightening policies, de-risking put Nigeria’s economy on red alert• Policymakers of countries with high inflation, debts to brace up• Debt refinancing, servicing cost may rise to unsustainable level, IMF, World Bank warn• FG to fund 2022 budget N6.4 trillion deficit at higher cost • Direct investments won’t respond to interest hike, says Teriba   • Nigeria’s market to expect higher interest, sources suggest

A global tightening of developed economies, particularly as announced by the United States Federal Reserve System and other developed countries, has raised fresh panic about Nigeria’s investment outlook with capital flight feared to worsen in coming months if not checked. This comes as sources pointed out that Nigeria’s Monetary Policy Committee (MPC) is also contemplating a higher interest rate, as the economy is believed to have achieved modest stability while inflation continues to raise concerns.    In response to the sticky U.S. inflation rate, which hit seven per cent yesterday, the highest since 1982, an inflation-weary Fed disclosed that it would increase the interest rate, at least three times in the year, but some Wall Street banks, including Goldman Sachs, see the Fed increasing the rate four times.

This has sent jitters across markets with high-risk assets. For instance, cryptocurrency losing in the first week of January for the first time since 2018, with bitcoin losing over 40 per cent from its all-time high.   But interest hike is just a part of the U.S. impending tightening. The Fed is also working towards unwinding its huge stimulus programme in March as it battles to firm up the value of the dollar and keep inflation at a manageable level. This tightening could trigger a massive outflow of assets from extremely risky markets, including Nigeria. The interest rate hike will make the international debt market more expensive and servicing of existing dollar-denominated debts more challenging for political and corporate entities with huge exposures, economists have warned.    Nigeria’s external debt component was N15.6 trillion, 41 per cent of its total N28 trillion national debt stock. Of the N17.1 trillion total spending plan in the 2022 budget, over N6.39 trillion shortfall is expected to be funded with fresh debt and proceeds from the sale of public assets. According to the document presented by the Minister of Finance, Budget and National Planning, Zainab Ahmed, the Federal Government proposed to source N2.57 trillion from the international market and another N1.16 trillion from multilateral and bilateral loan drawdowns to finance the fiscal deficit. Experts say the international debt market would be more expensive this year.      This was corroborated by the World Bank, in its January Global Economic Prospects, just released. The Washington-based institution warned of impending rise in financial stress in emerging markets and developing economy (EMDE) regions as tightened monetary measures could drive up debt refinancing and servicing costs to unsustainable levels and trigger capital outflows.  Amid rising de-risking across markets, the International Monetary Fund (IMF), on Monday, also called on policymakers across the globe to prepare for spillovers from the U.S. liquidity tightening, which it warned could hit vulnerable countries hard.   In a blog post, the IMF noted that the tightening could make “the outlook for emerging markets more uncertain” as the countries battle “elevated inflation and substantially higher public debt.”   A regression analysis, covering 2020 to 2021, conducted and reported by IMF in the post, supported that capital flows to emerging markets would weaken as the dollar appreciates relative to other major currencies.   “The impact of Fed tightening could be more severe for vulnerable countries. In recent months, emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances saw already larger movements of their currencies relative to the U.S. dollar.

“The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies, as the IMF highlighted in its October releases of the World Economic Outlook and Global Financial Stability Report,” it stated.   It listed possible financial system crises as a spillover of the U.S. tightening, urging national economic policymakers to consider plans to preserve financial stability. It stressed that “countries, where corporate debt and bad loans were high even before the pandemic, as well as some weaker banks and nonbank lenders, may face solvency concerns if financing becomes difficult.”

NIGERIA’S inflation was last estimated at 15.4 per cent, making it among the top countries with the most disturbing inflation growth. With the market interest rate currently lagging, real rates of return are in the negative region, making capital flight a major challenge.   Reacting to the alarm raised by IMF, Victor Ogiemwonyi, a retired investment banker, said: “The expected tightening will affect Nigeria and most of Africa, the low cost of capital in the U.S. has incentivised flows/investments into emerging markets, like Nigeria. This investment flow will now be very slow.” According to the economist, the situation would complicate Nigeria’s “borrowing plan” as sources for funding the current budget will be more expensive and debt service, which is already a problem, will become even more problematic.   “Those banks with foreign loan exposure will also find servicing of the loans to be more expensive. The severity of its effect on Nigeria will depend on how well we are able to respond.

“First, we must do everything to push our oil production up. The budget projects oil production at over two million barrels a day (mbd). We are currently doing only 1.8 mbd; that in itself is already a problem. We must pump at least 2.5mbd and also hope oil prices will remain high in the $70 range. Higher oil production and high prices will raise our revenues and ease our FX scarcity. These are just efforts for raising revenues,” he said. On the expenditure side, he said, aggressive efforts must be made to address waste and block leakages.

According to him, a measurable target could be reducing the cost of governance by 30 per cent in the short term. How the government addresses fuel subsidy and management of foreign exchange market, he said, would determine the country’s ability to weather the storm.

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