“US immigration restraints on Nigerians to raise FX risk, limit remittances”

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Tellimer

“US immigration restraints on Nigerians to raise FX risk, limit remittances”

The recent immigration restraint by the United States of America on Nigerians due to the current state of affair has economic impacts.

On one side, it could water down the nation’s credit rating, limit foreign inflow and raise unfavourable trade balance, Broadstreet experts told MarketForces in a chat.

In the same tone, Hasnain Malik, Head of Equity Research at Tellimer, an emerging market focus financial services firm headquartered in London, in a note said the restriction would add risk to foreign exchange rate.

Most importantly, remittances to Nigeria would be affected if the decision is not upturn in a short term. The medium to long term effect would be drastic on remittances and foreign exchange.

Recently, the Central Bank of Nigeria (www.cbn.gov.ng) discredit plan to devalue the local currency as numbers of analysts reviews show that naira is overvalued.

Nonetheless, some currencies traders that spoke with MarketForces confirm that trading patterns indicate that naira has been largely stable.

According to currencies traders, the CBN multi-tiered FX exchange has curb arbitrage and achieved greater feat in convergence, though at the expense of accretion into the external reserves.

MarketForces research shows that the nation’s external reserve has dropped off from peak period in 2019 to $37.85 billion on Thursday.

 Analysts however predict that FX level would further nosedive on the back of scarce foreign investment in the economy.

It would be recalled that US recently applied restrictions on the sort of immigration visa which can lead to permanent residency, and possibly citizenship, for Nigerians.

Tellimer’s Malik said in the medium-term, prolonged US immigration restrictions would add a new risk for the Nigeria FX rate.

He relates this to the importance of remittance inflows to Nigeria and the position of the US as the single largest source of those remittances accounting for about 30% in 2018.

“This reinforces our relative caution on Nigeria’s cheap equities”, Tellimer said.

More important than oil

Malik sees remittances as a major contributor to the current account balance in Nigeria, amounted to 5.4% of GDP in at the end of 9 month in 2019 fiscal year.

“Remittances are even more important than oil revenues; they were 60% larger than oil revenues in 2018 and 5.7x larger than foreign direct investment in the same period”, he stated.

Tracking the growth, remittances grew 10% in 2017 and 2018 before declining 0.5% in 9-month to year 2019.

“Already, Nigeria’s FX rate is moderately over-valued and vulnerable. FX reserves have been in decline since mid-2019.

“The real effective exchange rate implies an over-valuation on an absolute basis as well as relative to history”, Malik reiterates.

Equities: Cheap for a reason

In the review, Tellimer’s Head of Research observed that Nigerian equities have under-performed frontier peers on a one-year view – despite a significant bounce year-to-date – and look cheap at the index and stock-specific level.

“But the lack of macroeconomic growth catalysts and structural reform, persistently high inflation, and moderate FX rate risk keep us cautious”, he said.

Nigeria has responded by appointing a committee with ministerial leadership to address these shortcomings.

Malik said the reason given for the restriction is insufficient security screening and information sharing in Nigeria.

The restriction excluded Business, medical and tourist visas.

Apart from Nigeria, the other countries included in the new US restricted list are Eritrea, Kyrgyzstan, Myanmar, Sudan, and Tanzania.

The existing restricted list includes Iran, Libya, North Korea, Somalia, Venezuela, and Yemen.

The Trump administration has argued that these countries affected have had problems with a range of issues, from failing to update passport technology to insufficient exchange of information on terrorism suspects and criminals.

Of the new nationalities facing visa restrictions, Nigerians account for the most immigration to the US.  In 2018, the US issued more than 8,000 immigration visas to citizens of Nigeria.

Analysts Build Case for Devaluation, Says Naira Walking On Eggshell

Afrinvest had said it expects currency pressures in 2019 ahead of the elections and the weak prospect for higher oil prices and capital inflows.

But analysts at the firm despite three consecutive quarters of negative current account balance, the worst since second quarter of 2015, the exchange rate was stable for most of 2019.

“The stability was supported by weekly FX sales by the CBN in the various foreign exchange markets.

“In 2020, we believe the dark clouds are gathering, indicating further currency pressures and an imminent devaluation”, Afrinvest opened.

The firm revealed that aside from weak oil prices and capital flows, which would be the fundamental drivers of currency movements, there has been an aggressive liquidity build-up in the economy.

“The latter is due to an expansion in credit and large amounts of OMO maturities without high-yielding investment outlets.

“In our view, this could lead to increased demand for imports, which would depress the current account balance”, analysts said.

Afrinvest also projected could be higher FX demand as the case for diversifying investments into dollar assets is compelling given negative real returns domestically.

Analysts expect currency stability in the first half of 2020 and 10% devaluation to ₦396.00/US$1.00 in the second half of 2020 if capital flows remain weak and oil price falls below US$60 barrel per day.

US immigration restraints on Nigerians to raise FX risk, limit remittances by Gbenga Anisere