How Financial Markets Balance Inflation, Interest, FX Rates Dynamics
Nigeria’s macroeconomic indicators have shown some sort of improvements, definitely against reality on the ground, but for the data sake, things are improving except for Naira which appears to have been worsening despite market intervention.
Inflation has been descending, which is quite positive for financial markets but nay, not for the fixed income investors amidst what some analysts call financial repression.
Financial repression, a situation where the Nigerian government borrows from investors below the average headline inflation rate in the country.
After 19 consecutive months of an uptrend, inflation started moderating in April 2021 and it is more likely to continue downtrend, based on analysts’ projections as base effects flattered the figure.
A negative real return in the fixed income resulted from a low-interest rate environment. What the Nigerian government is saying effectively to cash owners is that: “We aren’t paying for taking no-risk”!.
Demand for fixed interest rate instruments is on the rise, taking a look at subscription level at the primary market auctions conducted by government agents – both Central Bank and Debt Management Office to be precise.
Following heavy demand patterns, it has not been difficult for these agents to reduce spot rates based on demand and supply forces. This has reduced government debt service cost strongly.
Before August 2019 when Central bank individuals from accessing the OMO market, banks were playing hard in the fixed income market.
A first generation bank Chief told analysts at an earnings conference then, but before the OMO ban, that he doesn’t have to risk depositors funds by raising lending appetite when he could comfortably earn about 18% risk-free!
Things have reversed, banks must lend to get squared with the apex bank with increased cash reserve ratio – opportunity cost for not lending enough has nullified not meeting CBN target.
Disinflation position has helped reduce negative real return earned by fixed income instruments holders buy market dynamics still has a way to ensure no investors earn close to the inflation rate.
However, a low-interest rate has not really translated to better lending for borrowers. Banks still demand as much as 30% or more from borrowers – however, based on credit standing and of course certain individuals on some banks board of directors are still getting lower double-digit access to credits.
The majority of the people in these categories access most of the Central Bank of Nigeria intervention funds, paying between 5% and 9%, according to various financial statements of banks reviewed by MarketForces Africa.
For banks, the average industry margin on interest yielding assets has sloped downward and it will probably remain so given the fact that CBN will stay pro-growth under President Muhammadu Buhari’s social interventionist policy.
The elephant in the room, foreign exchange policy, has not been successful. Despite a number of devaluations that place the local currency on the bottom of the rung in the foreign exchange markets, Nigeria’s naira still remains relatively overvalued.
CBN has maintained a stance, not to devalue the naira but it hasn’t really worked considering how the United States dollar has eclipsed the local currency in the foreign exchange (FX) markets. Naira future still remains uncertain, according to some analysts.
Recently, the International Monetary Fund in a mission to Nigeria asked the monetary authority to unify FX rates while seeking a market-clearing rate that would attract foreign investors.
Down the year, MSCI Index had threatened to downgrade the Nigerian index, citing inability of foreign investors to get the greenback out of Nigeria. CBN had initiated a subtle capital control to stem naira from free falling.
MultiChoice, in its investors’ relations report, hinted that the entertainment company gets to use parallel market rates to get a unit of US dollar.
Between the second and third quarters of 2021, MTN Nigeria stylish celebrated its ability to upstream cash to its parent company, which the telecom think was a miracle. How Financial Markets Balance Inflation, Interest, FX Rates Dynamics
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