By Obinna Chima
The anticipated hike in interest rate by the Federal Open Market Committee (FOMC) of the United State Federal Reserve is expected to have a negative impact on foreign capital inflows into Nigeria as well as on foreign exchange (FX) rate.
Owing to this, analysts at FSDH Merchant Bank have advised companies in Nigeria to limit their FX exposure.
They
gave this advice in their macroeconomic and financial markets outlook
(2019 – 2021) titled: “Bumpy Road Ahead – Policy Options and
Strategies,” unveiled at the weekend.
In fact, the firm predicted that the
US Fed may raise the rate three times in 2019 to a range of 3.00%-
3.25%. However, FSDH Research does not expect a rate hike at the January
2019 meeting. The FOMC will have its first 2019 meeting on 29-30 of
January.
Providing
insights on the report, the Head of Research and Strategy at FSDH
Merchant Bank Limited, Mr. Ayodele Akinwunmi, also advised companies to
adopt FX hedging strategies as well as embark on import substitution
strategies and invest in sectors that have export content to grow
revenue.
On the
other hand, he urged the federal government to develop the non-oil
export sector of the economy, in order to increase FX earnings for the
country as well as adopt a uniform FX rate regime and simultaneously the
removal of subsidy.
Akinwunmi,
stressed that further increase in the interest rate in the
international financial market may lead to higher interest expense on
FGN borrowings from the international market than the existing loans;
rise in yields on fixed income securities may rise lead to increase in
interest expenses for corporates; increase in interest rates on foreign
debt; monetary policy challenges and pressure on foreign currency and
decrease in global financial liquidity which may affect financial flows
into the Nigerian financial market.
“FSDH
Research expects the average crude oil price to drop in 2019 compared
with that of 2018. A significant decline in the crude oil price will
have negative fiscal and monetary implications for the Nigerian economy.
“The US
and China trade war may also lead to a drop in the demand for crude oil
leading to a drop in price. China and US account for about 33 per cent
of the global crude oil demand. The OPEC production cut may reduce the
Nigerian government’s revenue if crude oil price does not rise to
compensate for the output cut. This will increase fiscal deficit, also
put pressure on exchange rate, inflation rate and interest rates,” he
explained.
Therefore,
Akinwunmi advised Nigerian policy makers to implement policies that
would lift aggregate demand in the domestic economy, saying investment
in critical infrastructure would grow key sectors of the economy and
allow for stronger buffers against external shocks.
It is
also important to invest in human capital, quality education and
healthcare in order to increase productivity in the country, he said.
He predicted an adjustment in the value of the exchange rate toward N390/US$ in 2019.
FSDH
Research estimated a real Gross Domestic Product (GDP) growth rate of
1.94 per cent in 2018 and predicted a growth rate of 2.48 per cent in
2019.
“The
real GDP in 2018 showed improvement but the economy remains fragile. The
real GDP growth rate still remains sluggish – lower than the population
growth rate in the country of about 2.78 per cent. As at third quarter
2018, the three largest sectors of the economy, which account for 56
per cent of the total GDP, recorded positive growth rates. FSDH Research
notes that other dominant sectors of the economy which contracted
during the quarter recorded lower contractions than were recorded in
second quarter of 2018,” the report stated.
In terms
of the opportunities in the Nigerian economy, the report noted that the
agriculture and agro-processing sector would continue to generate
investors’ interests as some manufacturing firms adopt backward
integration strategies. It anticipated that the federal government and
states would sign more public private partnership (PPP) to develop
promote infrastructure development; that construction activities would
continue to grow – road, rail, etc; the emergence of real estate sector
from economic depression should create job opportunities for all
categories of labour.
However,
it identified a possible drop in government revenue and foreign
exchange inflow because of expected drop in crude oil exports; elevated
inflation on account of removal of subsidy on Premium Motor Spirit (PMS)
pump price which is capable of eroding the purchasing power of
consumers in the short-term; weak infrastructure in the country leading
cost of doing business; expected increase in yields on fixed income
securities which may increase borrowing cost and reduce earnings as well
as a possible insurgencies in the oil producing states or food
producing regions in Nigeria, as some of the potential risks the economy
may face.
It anticipated that inflation rate in 2019 would average 12.50 per cent.
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