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April 26, 2018 12:45 am
In 2017, foreign portfolio investment grew in excess of 200% buoyed by high yields on government treasury bills and stability in the foreign exchange market. This was a product of the tight monetary policy stance adopted by the government in the last 2 years. The Central Bank of Nigeria has not been the only African country that tightened monetary policy to combat rapidly rising inflation, other countries like Ghana and Egypt also took such steps with effective results.
However, with such polices being largely effective in Africa, there seems to be a harmonization of Central Bank decisions around the continent as the largest economies, South Africa, Ghana, Kenya, Egypt and Nigeria are all looking to ease monetary policy this year to reduce borrowing costs for the real economy and encourage growth. Unfortunately, this is also happening at a time the Federal Reserve Bank of America is raising interest rates at market choking pace and the Bank of England finally raised interest rate in 2017 for the first time in almost a decade. Also, the European Central Bank and Bank of Japan are also starting to wind up quantitative easing in some form as the economy seems to be prospering while inflation gradually edges north.
The risk here is that we expect capital to flow out of Nigeria as rising political risk and falling treasury yields makes Nigeria an unattractive Capital destination for foreign investors in 2018. Already NSE has seen foreign portfolio investment reduce by more than N120b in the first quarter of 2018. We expect this trend to continue as funds flow out of Nigeria and into US treasury market where yields will continue to get juicier with three more Fed rate hikes expected during the course of the year. Since other large African economies are also easing, we expect similar trends to occur in these economies.
Large capital outflows in Nigeria and Ghana will have significant negative impacts on the exchange rate and the Central Banks in both nations will need all the ammo they can get to support the currency through the year long process. We expect the Naira and the Cedi may be devalued this year as capital outflows pick up pace and loose monetary policy (which Ghana has already began and Nigeria will join by mid year) occur simultaneously in 2018. Although we expect both currencies to drop, we do not anticipate the national currencies to drop by more than 15% due to rising crude oil prices which is a key source of foreign exchange earnings to both countries.
While foreign investors take cash home to more business friendly environments, Central Bankers in Africa must ensure that large capital outflows and weaker currencies do not bring back the inflationary pressure they struggled so hard to control in past year.
Emeka Ucheaga
Ucheaga is Managing Partner, Emeka Ucheaga Advisory
