Portfolio investors’ exit worries MPC members
Members of the Monetary Policy Committee of the Central Bank of Nigeria have expressed worry over the exit of foreign portfolio investors from the country on the back of the rise in interest rates in the United States.
In a communiqué of the MPC meeting of May 21 and 22 with the personal statement of members which was released on Monday, the Governor, CBN, Godwin Emefiele, who doubles as the chairman of the eight-man MPC, and most of the members raised concerns over the recent tightening stance of the US Federal Reserve.
“The recent tightening stance of the US Fed, if not sufficiently mitigated, has significant implications for price and exchange rate stability in Nigeria,” Emefiele said.
A member, Prof Adeola Adenikinju, said the rising interest rate in the US might lure portfolio investors away from emerging economies, especially Nigeria in a pre-election year.
He said, “Foreign reserves continue to climb up although rate of accretion declined between the last and current MPC meeting. The declining accretion in my view is a reflection of a number of factors; first, reluctance of some portfolio investors to roll over their investment in the economy, and actually exiting the economy.
“The stock market continues to soften in spite of the relatively good performance reported by many quoted companies. This suggests profit taking and capital outflow, especially by portfolio investors. This is a critical warning signal to me of the possible trend in the coming months as elections uncertainty sets in.”
Another member, Prof Dahiru Balami, who described the performance of the capital market as bearish, said investors were gradually divesting to foreign markets offering higher yields.
The Deputy Governor, Corporate Services, CBN, Mr Edward Adamu, noted that the recent rally in oil prices had had a positive impact on external reserves accretion and boosted the economy’s resilience and investor confidence.
He said, “Partly as a consequence, inflows, especially of portfolio investment improved. However, by their nature, such inflows are susceptible to sudden reversals; this reality needs to be factored into policy consideration and actions today.”
He, therefore, stressed the need to build buffers on both fiscal and monetary sides in preparation for a possible downturn.
“In view of the continued increases in interest rates by the US Federal Reserve, a reversal in foreign portfolio investment may occur, as has been the case in a number of emerging markets,” the Deputy Governor, Financial System Stability, Mrs Aishah Ahmad, said.
She said this could immediately put pressure on the exchange rate, a situation that would be better managed with healthy fiscal buffers and a more diversified source of foreign exchange over the long term.
She stated, “Policy rate hikes in the US and other advanced economies increase the likelihood of these reversals. Yields on the US 10-year treasury notes crossed the three per cent mark in April 2018 for the first time in four years, while further monetary policy rate hikes are expected through 2018.
“These higher rates in the US, coupled with reducing supply of Nigerian sovereign debt instruments (as the fiscal authorities restructure the debt stock) amid slightly declining yields, have led to mild foreign portfolio flow reversals which are bad for exchange rate stability particularly in the short term.”