Govts, Firms Urged to Build Buffers against External Shocks

Analysts at FSDH Merchant Bank Limited have warned that current developments in the global financial market may lead to rising interest rate and possible capital flight, particularly from developing countries. Owing to this, they stressed the need for companies and countries, particularly Nigeria, to build buffers to protect themselves.

The bank stated this in a report on its monthly economic and financial markets outlook titled: “Easy Money: Time to Create Buffers.”

According to the report, many central banks in both advanced and developing countries have been adopting expansionary monetary policy stance in order to stimulate economic growth.

For instance, it noted that the Federal Open Market Committee (FOMC) of the U.S Federal Reserve System cut the interest rate in July 2019, the first rate cut since 2008; the Bank of Japan maintains a negative policy rate; the European Central Bank maintains the interest rate at zero; and the Bank of England maintains the interest rate at 0.75 per cent, which is considered low compared with the historical average of 3.89 per cent between 2006 and 2009. Also, the South African Reserve Bank lowered its interest rate in July 2019; while the Central Bank of Nigeria (CBN) also lowered its interest rate in March 2019 and has indicated its preference for low interest rate, causing yields on fixed income securities to drop. But commenting on the report, the Head of Research and Strategy at FSDH Merchant Bank, Mr. Ayodele Akinwunmi, said the strategies by central banks across the globe had created easy money (low cost of fund) in the global financial market and by extension, in Nigeria. “Individuals, companies and governments can now borrow money both from the domestic and foreign financial markets cheaper than in the last few months. FSDH Research has observed that many banks and other credit providers in Nigeria have recently begun aggressively pushing credit to their customers.

“The federal government of Nigeria is refinancing maturing debt obligations and taking on new debt at cheaper rates because of the low interest rate environment.

“Foreign Portfolio Investors (FPI) are aggressively investing in fixed income securities in Nigeria with reasonable yields because of the low interest rates in advanced countries and the expectation of a further interest

rate cut, particularly in the US.

“If the current trade tensions between the US and China subside and the economic growth in the two countries returns to an upward trend, there may not be a need for excessive expansionary monetary policy,” he explained.

According to him, the developments in the US and China affect the global economy as the two countries account for about 40 per cent of the global economy in terms of Gross Domestic Product (GDP).

The two countries also account for about 33 per cent of total global demand for crude oil. This also means that developments in these countries may affect the demand for crude oil and lead to a price drop, he added.