CBN in measured moves to save the naira September 16, 2013 | Filed under: main story | Posted by: Editor The Central Bank of Nigeria (CBN) is in measured moves to save the local currency, the naira, to curtail the adverse impact of the US Federal Reserve reduction of its assets purchase, known as tapering, as well as keep loose fiscal activity in check preparatory to the general elections of 2015, BusinessDay has learnt. Already, the CBN has hiked cash reserve requirements (CRR) for local banks from 12 percent to 50 percent on public funds in order to tackle liquidity which is often at the base of big spending. However, analysts believe that the apex bank will consider further monetary tightening measures ahead of the 2015 elections. “Market is expecting that the Fed may announce that it will start to reduce its asset purchase (known as tapering) from September 18. If it does, it will buy less bonds, and yield will go up which will encourage investors to start moving their funds out of emerging markets to the USA,” a CBN top official told BusinessDay. He said the withdrawal of foreign portfolio funds would lead to pressure on the currency, which would fuel increased demand for forex and depreciation of the currency as well as inflation. “Monetary policy will therefore have to respond appropriately, through tight monetary policy to encourage inflows to stay and also attract investments,” he further said. The US Fed, according to reports, is more disposed to start tapering and might cut back monetary stimulus as an outcome of its scheduled meeting Tuesday and Wednesday this week, the first step toward ending the era of easy-money. The Fed proposes to do this by scaling back on its monthly bond-buying programme. The decision has palled the expectations of emerging economies of the world, in addition to huge anticipation of who replaces Ben Bernanke next year as Fed chairman. Specifically, the Fed decision will affect the Nigerian economy in area of capital inflows, which are likely to slow and probably reverse, if tapering is substantial. The implication will mean less of purchase of bonds with the consequent higher yield thereby encouraging investors to move their funds out of emerging markets, such as Nigeria, to the USA. This will put pressure on the naira, while renewed demand for foreign exchange can also lead to likely depreciation of the currency. This development is inimical to the economy that is wholly dependent on oil whose fortunes have been nose-diving lately. Samir Gadio, emerging markets strategist at Standard Bank, London, said an important driver of the FGN bond performance remains global monetary policy and the outlook for US interest rates. According to him, with the Fed likely to scale back bond buying by year-end, the two obvious implications are that some degree of risk aversion will persist in global markets while US treasury yields are set to edge up on a multi-month basis. In this context, a resumption of large offshore capital flows into Nigerian bonds looks unlikely. “On the FX front, QE tapering implies that emerging market currencies will remain under relative pressure in the medium term, having already lost ground in recent months. “But the CBN is likely to tighten liquidity conditions further to protect the NGN. As a result, more appealing re-entry levels should emerge at the short end of the yield curve. Yet (as we indicated earlier), new meaningful foreign flows into the fixed income market are less likely to resume, especially at the long end given the cautious global risk environment,” he said. Ayodeji Ebo, research analyst at Afrinvest Securities Limited, said “the Nigerian economy has been an attractive destination for FPI due to the attractive yields, undervalued equities and a fairly stable naira”, adding that a likely runoff on the market will dampen share prices, cause a further devaluation of the naira, a significant outflow from the bond market, and a drag on the All Share Index (ASI). Since the tapering indications by the Fed chairman on May 22, 2013, the ASI has lost 3.2 percent.
Posted on: Mon, 16 Sep 2013 14:11:51 +0000
Recently Viewed Topics
© 2015