Fed Tapering Plan Could Drive Dollar Out of Nigeria –Analysts

Fed Tapering Plan Could Drive Dollar Out of Nigeria –Analysts

Fed Tapering Plan: Nigeria could see more foreign currencies outflow from the local financial markets amidst the United States Federal Reserve’s asset purchase tapering talks, a cut for tighter monetary policy for countries with moderate external reserves positions.

Next month, the Central Bank of Nigeria monetary policy committee is expected to meet for the last time in 2021. At the same time, Fed’s committee will also be having a meeting to decide on the assets purchase tempering.

Analysts explained that the tempering on the bond-buying in the States is expected to have bearing on interest rates in other stable economies with possible upward adjustments at the latter part of the year, according to some analysts. 

Nigeria needs dollar inflow to survive but foreign investors would find the country uninteresting to put their funds if assets purchase cutback talk in the United States becomes fruitful due to low-interest rate environment and inflation-exposed yield in the fixed income market.

MarketForces Africa reports that the United States Federal Reserve appears likely to begin curbing the central bank’s $120 billion in monthly asset purchases that were implemented during the height of the COVID pandemic as early as next month with an eye to ending the program in mid-2022, according to minutes from its policy-setting panel’s September meetings.

For more than a year and a half, the Fed has been purchasing $80 billion of Treasury securities and $40 billion in agency mortgage-based securities per month, saying they would remain in place until employment and inflation levels were closer to its targets.

This has lifted the Fed’s balance sheet from $4.3 trillion as of March 2020 to $8.5 trillion in September 2021 as Chairman Jerome Powell announced in August the need to taper asset purchase.

“A large sum of the investment fund in the local market more likely to fly to seek safe haven by the time bond buying tapering by the Federal Reserves is finalised”, analysts told MarketForces Africa.

Tempering asset purchases in the U.S, which according to FOMC minutes, could begin in November would lead to massive exits that will make Nigeria very uncompetitive to attract foreign currency.

Other emerging and frontier markets are also exposed, especially those with moderately high-yield fixed income where foreign investors have taken position.

A large number of African countries rely on foreign inflow into their financial markets in addition to remittances to survive heavy imports bills, MarketForces Africa gathered. The resultant effect of asset purchase cutback is an interest rate hike.

A rise in interest rates in the United States would have a spiral effect in other countries with similar relevance to the global economy. However, it is not totally clear if foreign investors can get funds out of Nigeria, though foreign reserves is now at about $40 billion.

Some analysts think the monetary policy authority would likely increase the benchmark interest rate at its November meeting, coincidentally, Federal Open Market Committee is expected to meet in November.

The monetary Policy rate has stayed at 11.5% as Central Bank maintains a pro-growth stance to drive credits into the real sector of the economy. If the FOMC decides to begin tapering the purchases at its next meeting on Nov. 2-3, the process could begin in the middle of that month or in mid-December.

The low-interest rate environment has kept yields on financial securities down, trending behind the inflation rate. With disinflation, the negative real return on investment has narrowed, according to CardinalStone Partners.

Nothing much is expected from the fixed income instrument issuances in the latter part of the year amidst the inflation rate slowdown. For the sixth consecutive month, Nigeria has seen a strong drop in the headline inflation rate, which has not moderated negative real return on fixed securities investments.

Moodys said in a report last month the cutback in asset purchase could last for 8-months with at least $15 billion monthly reductions.  #Fed Tapering Plan Could Drive Dollar Out of Nigeria –Analysts

Read Also: U.S. Dollar Declines on Shift in Asset Price Tapering

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