Cheap borrowing, capital inflows are opportunities for Nigeria as Fed cuts rates

The US Federal Reserve last week lowered interest rates for the first time in 10 years to help stave off the possibility of an economic downturn, a move which analysts say holds opportunities for Nigeria.

Top on the list of benefits Nigeria stands to gain from the rates cut, according to the analysts, include capital importation in form of foreign portfolio investment (FPI) and cheap cost of borrowing for Federal Government and corporates that may want to go to the international market for bond issuance.

“Rate cut by systemically important central banks like the Fed simply means possibility of increased FPI flows into emerging markets,” said Ayorinde Akinloye, a consumer goods analyst at Lagosbased CSL Stockbrokers.

“Nigeria’s money market instruments remain a big attraction for foreign investors, thus Nigeria may see more inflows into that space,” Akinloye said.

He, however, does not expect such inflows into equities market considering foreign investors still maintain a risk-off approach to investing in Nigerian risk assets.

The Boards of Directors of the Federal Reserve Banks of Philadelphia voted 8-2 in favour of a small cut in the federal funds rate, and recommitted to their promise to “act as appropriate” to sustain the country’s longest eco

nomic expansion in history.

The Fed unanimously approved a 1/4 percentage point decrease in the primary credit rate to a range between 2 to 2.5 percent. This is 25 basis points lower than the primary credit rate of 3 percent voted on December 20, 2018. Fed Chairman Jerome Powell, however, left the door open as he signalled that the Fed was prepared to ease monetary policy further if necessary.

Lowering interest rates tends to reduce the value of a currency. If the US dollar reduces in value, then nonUS importers like Nigeria will benefit because their goods will become relatively cheaper.

A depreciating dollar could also prompt a fresh outflow of capital from dollardenominated bonds and instruments away to higheryield but riskier investments in the emerging markets.

“A rate cut is good for FPI inflows into the country because with a rate cut, our currently low yield environment will have a wider spread which will attract FPIS. However, the magnitude of the rate cut is also important,” Yinka Ademuwagun, research analyst at United Capital plc, said.

Kalu Aja, CEO of Afriswiss Capital Assets Management Limited, however, does not expect the rates cut to “automatically lead to a surge in FPI into Nigeria”.

A look at capital inflows into Nigeria after the US Fed Reserve cut its key lending rate in December 2008 showed that the total value of capital importation into the country rose 85 percent to $681 million in January 2009 from $367 million in the previous month, according to data obtained from the National Bureau of Statistics (NBS).

Thereafter, the US apex bank left the monetary policy rate unchanged at a record low of 0.25 percent for seven years until December 2015 when it raised the rate by 25 basis points to 0.50 percent.

Conversely, total value of capital importation dipped some 73 percent on a yearon-year basis to $710 million in the first quarter of 2016 from $2.67 billion in the comparative period of 2015. The decline was sustained by 61 percent to $1.04 billion in the second quarter; 34 percent to $1.82 billion in the third quarter; and 1 percent to $1.55 billion in the last quarter of the year.

Similarly, foreign portfolio investment to the country fell 70 percent in 2016 to $1.81 billion compared with $6 billion recorded a year earlier.

Despite Fed’s hawkish stance, capital importation into Nigeria improved in 2017 but waned when it raised rates at all its 4 meetings in 2018. This was evident in the value of foreign portfolio investment into equities, which dipped 35 percent to $2.36 billion from $3.63 billion, even as aggregate capital importation rose 37 percent to $16.81 billion.