As a result of the anticipated hike in interest rate by the Federal Open Market Committee (FOMC) of the United State Federal Reserve, which is expected to have a negative impact on foreign capital inflows into Nigeria as well as on foreign exchange (FX) rate, the FSDH Merchant Bank has advised companies in Nigeria to limit their FX exposure.
The advice was highlighted in their macroeconomic and financial markets outlook report (2019 – 2021) titled: “Bumpy Road Ahead – Policy Options and Strategies”.
The merchant bank predicted that the United States government may raise the rate three times in 2019 to a range of 3.00%- 3.25%. The firm however noted it does not expect a rate hike at the January 2019 meeting. The FOMC will have its first 2019 meeting on 29-30 of January.
Mr. Ayodele Akinwunmi, the Head of Research and Strategy at FSDH Merchant Bank Limited who provided insights on the report, advised companies to adopt FX hedging strategies as well as embark on import substitution strategies and invest in sectors that have export content to grow revenue.
However, Akinwunmi pleaded with the Nigerian government to develop the non-oil export sector of the economy, in order to increase FX earnings for the country as well as adopt a uniform FX rate regime and simultaneously the removal of subsidy.
According to Akinwunmi, further increase in the interest rate in the international financial market may lead to higher interest expense on FGN borrowings from the international market than the existing loans. He also said a rise in yields on fixed income securities may lead to increase in interest expenses for corporates; increase in interest rates on foreign debt; monetary policy challenges and pressure on foreign currency and decrease in global financial liquidity which may affect financial flows into the Nigerian financial market.
In the report, it was revealed that “FSDH Research expects the average crude oil price to drop in 2019 compared with that of 2018. A significant decline in the crude oil price will have negative fiscal and monetary implications for the Nigerian economy”.
It was also stated that “US and China trade war may also lead to a drop in the demand for crude oil leading to a drop in price. China and US account for about 33 percent of the global crude oil demand. The OPEC production cut may reduce the Nigerian government’s revenue if crude oil price does not rise to compensate for the output cut. This will increase fiscal deficit, also put pressure on exchange rate, inflation rate and interest rates”.
Akinwunmi advised Nigerian policy makers to implement policies that would lift aggregate demand in the domestic economy, saying investment in critical infrastructure would grow key sectors of the economy and allow for stronger buffers against external shocks.