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Rising US Interest Rates Threaten Capital Flows into Nigeria

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  • Rising US Interest Rates Threaten Capital Flows into Nigeria

Nigeria is not immune to the negative spillover effects of higher United States interest rates, which are capable of dampening foreign portfolio investors’ appetite for the nation’s financial assets, ‘FEMI ASU writes

Financial and economic experts have said the return of foreign portfolio investors to Nigeria is being threatened by the rising interest rates in the United States.

Last week, the National Bureau of Statistics said the first quarter of this year saw a continuous growth in total capital importation into Nigeria, the fourth consecutive quarterly increase since the second quarter of 2017.

It said the total value of capital imported in the quarter increased by 594.03 per cent year-on-year to $6.303bn, adding that the increase was driven mainly by portfolio investment, which accounted for 72.42 per cent of the total capital inflow into the country.

Portfolio investment, which stood at $4.565m in the first quarter, grew by 1,355.66 per cent and 31.27 per cent compared to the first and fourth quarters of 2017, respectively.

The NBS said the strong growth in portfolio investment was mainly due to the increase in money market instruments.

The nation saw an exodus of foreign investors after the steep fall in the price of crude oil from mid-2014 triggered a currency crisis and the first recession in 25 years.

But the total value of capital imported into the country rose in the third quarter of last year, for the first time since the fourth quarter of 2015, following the emergence of the economy from recession in the second quarter of last year. The rise was driven by portfolio and other investments.

“Rising US interest rates and the consequent narrowing of the interest rate differentials with Nigeria, where yields on sovereign securities are falling, pose a threat to the resurgence of portfolio inflows into Nigeria,” an Associate Professor and member of the faculty at the Lagos Business School, Dr. Doyin Salami, said.

The US Federal Reserve raised the federal funds rate, its benchmark interest rate, by a quarter point to a range of 1.5 to 1.75 per cent during its March 2018 meeting. It was the sixth rate hike since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015.

This month, the Fed held interest rates steady at the conclusion of its meeting, but economists have overwhelmingly predicted that it will next raise rates in June. Some analysts expect four total rate increases this year, given the strength of the economy, including a historically low unemployment rate, according to The New York Times.

KPMG Nigeria, in its Top 10 Business Risks in 2018/19 report, noted that the introduction of the importers and exporters window in the foreign exchange market last year by the Central Bank of Nigeria encouraged the return of portfolio investors to the Nigerian market.

It said the CBN’s commitment to curtailing inflation and maintaining stability of exchange rates suggested that it would be mindful of the inflationary impact of the elections as well as election-related reversals in capital flows.

“Also, the rising international interest rates (led by tightening monetary policy in the United States) and narrower differentials between domestic and international interest rates already reduce the incentive for portfolio inflows into Nigeria. In light of the above factors, it is expected that the CBN may choose to maintain high policy rates,” the financial services firm stated.

The Monetary Policy Committee of the CBN will hold its next meeting today (Monday) and Tuesday, with most of the analysts, who spoke with our correspondent, expecting it to keep the key policy rates unchanged.

According to Salami, the return of portfolio investors to Nigeria reflects the preponderance, so far, of the ‘pull factor’ – the Investors and Exporters’ Window – over the ‘push factor’, the differential between domestic and international interest rates.

“The recent weakness of the US dollar has supported oil prices, it now appears to be strengthening,” the former member of the CBN’s MPC said in his presentation at Renaissance Capital’s Pan-Africa 1:1 Investor Conference in Lagos on Wednesday.

The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, is of the view that the US Federal Reserve will increase interest rates in June.

He said, “The US interest rates have been increasing and the interest rate differential is not in our favour. When the interest rates in the US increase, the dollar becomes stronger. When the dollar is stronger, the price of oil will come down. So, there will be additional pressure of reversal of capital flows that came into Nigeria.

“It is a potential risk but the oil price has risen significantly in recent times; so, we are in a good place. But if oil prices come down, interest rates in the US go up, and capital begins to flow out of Nigeria, then we will have to deal with that pressure.”

Foreign transactions at the nation’s bourse reduced by 7.32 per cent from N132.21bn in March to N122.53bn in April, data released by the Nigerian Stock Exchange on Friday showed.

There was a 7.79 per cent decrease in foreign inflows from N69.71bn in March to N64.28bn in April, while foreign outflows also reduced by 6.8 per cent from N62.50bn to N58.25bn.

The Managing Director, Afrinvest Securities Limited, Mr. Ayodele Ebo, said, “Though our yield level may still be attractive, if we continue to see strong improvement in their (US) yield, then we will see more pull-out.

“I think in the last two weeks, there was sell-off across emerging markets. So, we may see foreign portfolio investors reducing their exposure and that may push up our own interest rates.”

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, also noted that rising interest rates in the US had negatively affected some countries without “the kind of yield environment that we have.”

He stated, “We have not seen foreign portfolio investors selling down to cover their positions in the US. It has not happened in Nigeria because we have an elevated yield environment.

“It (the US rate hike) would have created a problem for us if we do not have robust reserves, and the downside risk that exchange rate will weaken is low, because we are selling crude at almost $80 per barrel. Rather, what we should expect is further accretion to the reserves, which will give foreign investors additional comfort.”

The Global Chief Economist, RenCap, Charles Robertson, said, “Rising US interests will add to Nigeria’s borrowing costs, unless US rates are rising because of strong economic growth, which lifts oil prices and would then reduce Nigeria risk.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Inch Down Amid Dollar Strength and Interest Rate Concerns

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Crude oil prices declined on Monday as the U.S. dollar strengthened and concerns over potential interest rate hikes resurfaced.

Brent crude oil, against which Nigerian oil is priced, slipped marginally by 3 cents to settle at $85.21 per barrel following a modest 0.6% decline on Friday.

Similarly, U.S. West Texas Intermediate (WTI) crude oil saw a minimal decrease of 2 cents to close at $80.71 per barrel.

Market analysts pointed to the robust performance of the U.S. dollar, which gained ground after the release of positive Purchasing Managers’ Index (PMI) data on Friday.

Tony Sycamore, a markets analyst at IG in Sydney, noted, “The U.S. dollar has opened bid this morning and appears to have broken higher following better U.S. PMI data on Friday night and political concerns ahead of the French election.”

A stronger dollar typically makes dollar-denominated commodities like oil less attractive for holders of other currencies, putting downward pressure on prices.

Last week, however, both Brent and WTI crude contracts managed to gain approximately 3% each.

This was largely driven by increasing signs of demand recovery for oil products in the U.S., the world’s largest consumer of crude oil. Additionally, ongoing supply constraints enforced by OPEC+ further supported market sentiment.

According to ANZ analysts, U.S. crude inventories continued their decline while gasoline demand recorded a seventh consecutive weekly rise.

Moreover, jet fuel consumption has rebounded to levels last seen in 2019, indicating a robust recovery in travel-related fuel demand.

Speculative activity in the oil market has also been notable, with analysts from ING observing an increase in net-long positions in ICE Brent as traders adopt a more positive outlook heading into the summer months.

“We remain supportive towards the oil market with a deficit over the third quarter set to tighten the oil balance,” they stated.

Despite these bullish indicators, geopolitical tensions persisted, providing a floor for oil prices.

Escalating conflicts in the Middle East, including the Gaza crisis and increased drone attacks on Russian refineries by Ukrainian forces, continued to underpin market sentiment.

In South America, Ecuador’s state oil company Petroecuador declared force majeure on deliveries of Napo heavy crude for exports due to severe weather conditions.

Heavy rains led to the shutdown of a critical pipeline and oil wells, impacting production and exports.

Meanwhile, in the U.S., the number of operating oil rigs fell by three to 485 last week, marking the lowest count since January 2022, according to Baker Hughes’ weekly report.

Looking ahead, the interplay between the U.S. dollar’s strength, geopolitical developments, and economic indicators such as PMI data will likely dictate short-term oil price movements.

Investors and analysts remain vigilant for any shifts in these factors that could influence global oil market dynamics in the coming weeks.

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Gold

First Commercial Gold Transaction Nets Nigeria $5 Million in Foreign Reserves

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The Ministry of Solid Minerals Development has concluded its first commercial transaction under the National Gold Purchase Program (NGPP), bolstering the nation’s foreign reserves by $5 million.

Minister of Solid Minerals Development, Dele Alake, announced the successful sale of over 70 kilograms of gold, refined to meet the stringent London Bullion Market Association Good Delivery Standard.

Speaking at the presentation ceremony, Alake emphasized the economic significance of the transaction, stating that it injects approximately NGN 6 billion into the rural economy.

He lauded President Tinubu for his unwavering support for reforms in the solid minerals sector, highlighting the pivotal role of the NGPP in enhancing Nigeria’s foreign reserves and bolstering the value of the Naira.

“This transaction represents a strategic move to use the Nigerian Naira to acquire a liquid asset denominated in United States Dollars, demonstrating a viable strategy for fiscal and monetary stability,” Alake stated.

He further expressed confidence in the NGPP’s ability to contribute to Nigeria’s economic diversification agenda, fostering greater economic confidence and attracting foreign investment.

Executive Secretary of the Solid Minerals Development Fund, Fatima Shinkafi, explained that adherence to the London Bullion Market Good Delivery Standard ensures that Nigeria’s gold exports meet global trading requirements.

She emphasized that only gold bars meeting these standards are acceptable in the settlement of Loco London contracts, reinforcing Nigeria’s credibility in the global gold market.

President Tinubu, upon receiving a symbolic gold bar, commended the Ministry for achieving a crucial milestone in the nation’s economic diversification efforts.

He described the transaction as a concrete step towards realizing the objectives of the Renewed Hope Agenda, aimed at reducing economic dependence on oil and gas revenues.

Through initiatives like the NGPP, Nigeria aims to further enhance its gold reserves, promote economic stability, and create an environment conducive to sustainable economic growth.

The successful completion of the first commercial gold transaction marks a pivotal moment in Nigeria’s journey towards becoming a key player in the global gold market, driving economic prosperity and resilience.

The Ministry of Solid Minerals Development continues to advocate for supportive policies and regulatory frameworks that promote transparency, efficiency, and sustainability in the mining sector, laying the groundwork for future economic growth and development.

As Nigeria moves forward with its gold refining and export initiatives, stakeholders anticipate continued progress in diversifying revenue streams and strengthening the nation’s economic resilience on the global stage.

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Crude Oil

Oil Prices Slip as Japan’s Rising Inflation Signals Rate Hikes

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Crude oil fell in early trading on Friday as concerns over sustained high interest rates in both Asia and the United States weighed on the outlook.

This trend is attributed to Japan’s increasing inflation, which is prompting expectations of imminent rate hikes by its central bank.

Brent crude edged declined by 11 cents to settle at $85.60 per barrel while the U.S. crude oil declined by 9 cents to $81.20 per barrel.

Recent data revealed that Japan’s core consumer prices rose by 2.5% in May compared to the same month last year. This increase marks a growth from the previous month, suggesting that the Bank of Japan is likely to raise interest rates in the upcoming months to curb inflation.

In the United States, data released on Thursday showed a decrease in the number of new unemployment claims for the week ending June 14, indicating continued strength in the job market.

This persistent robustness in employment raises the likelihood that the U.S. Federal Reserve will maintain higher interest rates for a longer period.

Higher interest rates typically have a dampening effect on economic activity, which can subsequently reduce oil demand.

The prospect of prolonged elevated interest rates in two major economies has therefore put downward pressure on crude oil prices.

Despite the downward trend, oil prices received some support from the latest figures from the Energy Information Administration (EIA).

The data showed a drawdown in U.S. crude inventories by 2.5 million barrels in the week ending June 14, bringing the total to 457.1 million barrels. This exceeded analysts’ expectations, who had predicted a 2.2 million-barrel reduction.

Also, gasoline inventories fell by 2.3 million barrels to 231.2 million barrels, contrary to forecasts that anticipated a 600,000-barrel increase.

“Gasoline finally came to life and posted its first strong report of the summer driving season,” remarked Bob Yawger, director of energy futures at Mizuho in New York, highlighting the surprising uptick in gasoline demand.

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