Monday, February 03, 2014 7.24 PM / Meristem Research
In what seems to be an already unpredictable and delicate year for global markets, emerging market economies (EMEs) were 'thrown a curve ball' by the Fed following decision to further reduce its purchase of longer-term Treasury securities and agency mortgaged –backed securities by USD10bn contrary to expectation of a lesser reduction given the turmoil in EMEs.
With investors strategically re-allocating their portfolios away from markets susceptible to QE unwinding towards less volatile markets, it has become imperative for EMEs who were major beneficiaries of the 'hot money' to introduce policies that will help attract foreign portfolio and direct investments while slowing capital reversal and currency depreciation.
In the light of the above, EMEs have begun raising their key policy rates; South Africa raised its key interest rate by 0.50% to 5.5%, Turkey to 10% from 4.5% and India raised her repo rate by 0.25% to 8% all in a bid to halt the heightened outflow of capital and rapidly depreciating currency.
How does tapering impact on the Nigerian Economy?
No doubt the US Fed’s decision to taper will further impact EMEs, but the question remains: “How exposed is Nigeria to the ‘negative’ impacts of the further cut-down in Bond purchases by the US Fed?”
Data from the Nigerian Stock Exchange on Foreign-Domestic Participation shows that foreign transactions on the Exchange as at November, 2013 represented 47% of total transactions. Further analysis show that since July 2013, there was net outflow of foreign funds from the equities market suggesting that foreign investors may have priced-in tapering into their decision to either remain or exit the market.
Hence, in the short to medium-term we do not see a ‘grave’ depression in the equities market that can be exclusively linked to QE tapering by the US Fed, as other factors such as companies’ earnings, political ambience and the regulatory space will also play important roles in shaping the market trajectory.
Fixed income market
With yield environment as high as 13.46% (something only very few markets offer- Egypt 14.85%; Brazil 13.32%) and the apex bank’s commitment to defend the naira in the face of depreciation pressures, we do not expect any major capital outflow from the fixed income market. However, we believe foreign investors will continue to monitor currency to inform their decision to play the market.
Exchange rate and external reserves
Given the depletion of the Excess Crude Account from USD11.5bn (in December 2012) to USD2.5billion (as at January 17, 2014), disruption of activities of Oil companies, excessive dependence of the nation on importation, pressure on the Naira by foreign investors liquidating their investments, the commitment of the CBN to defend the naira; all suggest a likelihood of a depreciation of the naira going forward. We see a further depletion of the reserve in the light of these concerns.
We think inflation is likely to trend up in 2014 given expected increase in fiscal & election spending. Besides, any associated currency depreciation will have inflationary impacts (through imported inflation) as the nation is still largely an importing nation.
In the light of renewed pressures tied to further tapering by the US Fed, we anticipate further tightening. The last MPC concluded with an increase in CRR on public deposit from 50% to 75% to check exchange rate depreciation and inflation, while maintaining the current MPR at 12%.
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