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Fitch Downgrades Nigeria’s Credit Rating

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Fitch Ratings

International rating agency, Fitch Ratings Inc., yesterday downgraded Nigeria’s credit ratings, citing the likelihood of the country to miss its debt obligations.

In a statement issued, yesterday, Fitch said: “The outlooks are stable. The issue ratings on Nigeria’s senior unsecured foreign-currency bonds have also been downgraded to ‘B+’ from ‘BB-’. The Country Ceiling has been revised down to ‘B+’ from ‘BB-’ and the Short-Term Foreign-Currency IDR affirmed at ‘B’.”

The new ratings imply that though Nigeria is currently meeting financial commitments, there is a limited margin of safety and capacity for continued timely payments is contingent upon a sustained, favourable business and economic environment.

Explaining the rationale for downgrading the country’s rating, Fitch said: “Nigeria’s fiscal and external vulnerability has worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices. Renewed insurgency in the Niger Delta in the first half of 2016 has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency.

Forecast

Fitch forecasts Nigeria’s general government fiscal deficit to grow to 4.2 percent in 2016, after averaging 1.5 percent in 2011-15, before beginning to narrow in 2017.

“Despite expected increases in non-oil revenue, the agency expects overall general government revenue to drop to just 5.5 percent of GDP, from an average of 12 per cent in 2011-15.

“The fall in general government revenue represents a risk to the country’s debt profile. Fitch estimates general government debt/revenue will rise to 259 percent in 2016 from 181 percent in 2015, higher than the 223 percent median for ‘B’ rated peers.  Nevertheless, depreciation of the naira will increase the debt and debt service burden.

“On 20 June, the Central Bank of Nigeria (CBN) commenced trading on the inter-bank foreign exchange market under a revised set of guidelines that will result in a more flexible exchange rate. However, the new regime will not be fully flexible as it will still involve a parallel market as importers of 41 items are excluded from the inter-bank market, which will continue to hinder growth, capital inflows and investment, in Fitch’s view.

Uncertainty

Furthermore, the delayed change in exchange rate policy casts some uncertainty over the authorities’ commitment to a more flexible system. The CBN’s previous exchange rate policy of managing demand for hard currency and restricting access to dollar auctions at the official FX rate resulted in a significant shortage in dollar liquidity.

“Fitch expects that some continued intervention in the FX market will reduce international reserves, which were below USD27bn before the new market began trading, compared with USD34bn at end-2014. Fitch expects reserves to fall to 3.4 months cover of current external payments by end-2016. Fitch forecasts GDP growth to fall to 1.5 percent in 2016, down from 2.7 percent in the previous year, after GDP contracted by 0.4 percent year-on-year in the first quarter of 2016, stemming partly from low hard currency liquidity.  The second quarter is likely to experience a further contraction, as the resurgence of violence in the Niger Delta has brought oil production levels down to around 1.5 million barrels per day (mbpd) in May, from approximately 2.1 mbpd in January.”

The naira yesterday strengthened for the second consecutive day in the interbank foreign exchange market for spot and future transactions, while interest rate fell by more than half to 34 percent.

Data released by Financial Market Dealers Quote (FMDQ) showed that the interbank exchange rate for spot transactions rose to N281.67 per dollar yesterday from N282.8 on Wednesday, indicating N1.1 or 0.3 percent appreciation for the naira. However, the interbank exchange rates for all future transactions    remained stable.

On the other hand interest rate in the interbank money market dropped sharply by more than half in response to decision of Central Bank of Nigeria (CBN) to open its discount window for banks to use their treasury bills to fund foreign exchange purchases.

Interest rate on overnight lending fell from average of 68 per cent on Wednesday to 34 percent yesterday while interest rate on securitised lending fell to 30 per cent from 63 per cent.

Meanwhile FMDQ yesterday announced it has revised the methodology and publication standard for Nigeria Interbank Foreign Exchange (NIFEX) in line with the Principles for Financial Benchmarks of the International Organisation of Securities Commissions (IOSCO). The revised standard, the company stated, would take effect from today June 24, 2016.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya

Investment

Barclays Tell High Net Worth Investors to Shun Africa and Other Emerging Economies

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Barclays Bank

Barclays to High Net Worth Clients, Stay Off Africa and Other Emerging Economies

Barclays, one of the world’s largest investment banks, has started advising high net worth clients to stay off Africa and other emerging economies.

According to Barclays, despite the recent recovery noticed in emerging-market stocks, investors are better off avoiding the risks that still abound in emerging nations. Barclays Plc, however, advised high net worth clients to focus on U.S equities despite the S&P’s breakneck rally.

The investment bank said emerging economies do not have enough fiscal buffers to spend their way out of the COVID-19 pandemic and will likely continue to struggle in the near-time compared to the US with 12 percent of gross domestic product fiscal-support.

It said the huge US stimulus may halt rebound in emerging-markets stocks as more money is expected to flow into the world’s largest economy and its European counterparts.

“Compared to the U.S., emerging-market economies appear more vulnerable,” said Haider, the London-based managing director and head of global growth markets. “Their central banks have less room to maneuver, their governments may not be able to provide unlimited support and equity markets, given their sector mix, can be more challenged by an economic slowdown.”

Barclays added that even after 33 percent rebound in stocks of emerging markets since the panic selloff subsided in March, stocks are still down by 9 percent from year-to-date while the US S&P 500 stocks are up by 45 percent. Presently, their stocks trading at a 36 percent discount to US stocks, up from 25 percent three months ago.

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Economy

Crude Oil Rises to $43.1 Per Barrel on Production Cuts Extension

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opec 2
  • Crude Oil Hits $43.1 Per Barrel Following OPEC’s Production Cuts Extension

Brent crude oil, against which Nigerian oil price is measured, rose by 1.25 percent on Monday during the Asian trading session following OPEC and allies’ agreement to extend crude oil cuts to the end of July.

OPEC and allies, known as OPEC plus, agreed to extend production cuts of 9.7 million barrels per day reached in April to July on Saturday.

In the virtual conference, delegates agreed that members, including Nigeria and Iraq presently struggling to attain a 100 percent compliance level must keep to the agreement or be forced to do so in subsequent months.

Nigeria, Iraq and others failed to keep to the cartel’s agreement in May after reports show that Nigeria only managed to attain a 19 percent compliance level during the month while Iraq struggled to attain just 38 percent in the same month.

Russia and Saudi Arabia, the two largest producers of the group, warned members to stick to the agreed quota if they want to rebalance the global oil market.

While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

The potential return of Libyan output could also cause considerable challenges for the OPEC leadership.

Earlier on Monday, Brent crude oil hits $43.1 per barrel, more than a month record-high, before pulling back slightly to $42.83 per barrel.

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Economy

Gold Dips by 2 Percent on Better Than Expected Job Report

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  • Gold Dips by 2 Percent on Better Than Expected Job Report

Gold prices declined by 2 percent on Friday following a better than expected US non-farm payroll report.

The report showed an increase of 2.5 million payroll numbers against a decline of 7.5 million predicted by many experts.

The surprise number boosted investors’ confidence in US recovery as many dumped their haven investment (gold) for the stock market.

“We had significantly stronger-than-expected U.S. payroll numbers – an increase of 2.5 million versus an expectation of a decline of 7.5 million – that 10-million swing has brought forward expectations of the economic recovery in the United States,” said Bart Melek, head of commodity strategies at TD Securities.

Spot gold immediately declined by 1.9 percent per ounce to $1,678.81 while the U.S. gold futures slid 2.6 percent to settle at $1,683.

Gold was also being pressured by stronger yields and a slightly firmer dollar, “meaning the opportunity cost to hold gold in the portfolio has gone up,” Melek added.

The surprise didn’t stop there, US Dow Jones was up 614 points despite the protest going on the US and US-China tension.

Also, NASDAQ rose by 29 points while the S&P index added 50 points increase.

Note: Investors generally increase their investments in gold and other haven assets during a crisis to avert risk exposure and do the opposite once they sense a better economy.

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