• Saturday, April 20, 2024
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Emerging markets seek to checkmate the effects of hot money


As in most emerging economies of which Nigeria is one, hot money inflows are directed into stocks, bonds and property. With the exception of property, the other investment assets are very volatile and funds can easily be retrieved immediately.

There are many good indicators that suggest that hot money is in Nigeria, a situation which may prompt the regulatory authority to introduce some measures aimed at reducing the pace at which these funds will exit the country. First and foremost, the Nigerian equity market is dominated by foreign interests. Based on the data provided by Proshare, foreign equity ownership rose from 14.8 percent in 2007 to 59.9 percent by the end of November 2012.

Another factor that confirms the dominance of foreign investors is that two leading stock broking firms with foreign ownership have controlled the larger part of equity transactions on the floor of the Nigerian Stock Exchange. By week end April 12, 2013, Stanbic IBTC and Rencarp Securities both accounted for 33.7 percent of the market value and 25.7 percent of the volume of the entire market transactions. Similar trend was witnessed in equity transactions on the NSE throughout 2012.

With regards to bonds, a good number of Nigerian banks have raised funds through Eurobonds which provided opportunities for hot money inflows into the country.

Hot money comes under global scrutiny

Nigeria is just one of the countries where the regulation of hot money inflows is now an issue. According to China Daily, the regulation of hot money becomes an issue because of the persistent quantitative easing done by the developed economies. Experts that spoke with the newspaper identified imported inflation and asset bubbles once the program stops as the major concerns. “We should improve the relevance and flexibility of macro-economic policies to properly manage hot money flows, and take measures to ensure the stability of overall pricing levels,” the paper reports.

Both China and Nigeria are major trading partners of the United States of America where quantitative easing is done regularly. The reason why Nigeria should not rest on its oars is that China has a more buoyant economy, stronger currency and a more vibrant manufacturing sector than Nigeria’s. They still believe that urgent steps have to be taken.

“Although easing policies have played a role in stabilising the financial markets, over the long-term, excessive liquidity in the financial markets will inevitably lead to disordered cross-border capital flow. Not only will it harm financial market stability and push up commodity prices, it will put more imported inflationary pressures on Asian countries, particularly emerging markets, and may also lead to asset bubbles,” the experts that spoke to China Daily have noted. Already, landed property in Nigeria is more expensive than in some other developed countries.