Naira, banks to feel impact of US Fed rate hike

Emerging Markets currencies like the naira and corporates with dollar denominated borrowings, such as Nigerian banks, will be the first to feel the impact of the hike in interest rates by the United States Federal Reserve Bank.

The US Central Bank announced a quarter-point increase in the target range for the federal funds rate to 0.25-0.5 per cent, lifting it from the historic lows it has occupied since December 2008.

Equity markets rose across the world, while in Nigeria, the stock market was essentially flat, gaining 0.02 percent yesterday to close at 26,953.05 points. The Nigerian markets are down 22 percent year to date.

“The expected impact of the Fed rate hike on EMs will be a further depreciation of emerging market currencies and further slump in oil and commodity prices. In addition, many governments and corporates in such countries hold dollar denominated bonds and other debt instruments. “These will be more expensive to service due to the expected rise in the yield curve of such assets, as well as appreciation of the dollar.

“Therefore, we are likely to see a downward revision in economic growth projections and some capital outflow from EM markets, at least in the first quarter of 2016,” said Abiodun Keripe, head of Research and Strategy at Elixir Investment Partners Limited, in response to questions.

“On Nigeria, the increase in the Fed rate implies that banks might find it harder to service the over $2.5 billion outstanding Eurobonds, due to a combination of higher yields and dollar appreciation. This should lead to a jump in interest expense payable by banks. I do not see equities taking another leg down. Most foreign portfolio funds have exited the market same goes with the bonds.”

Nigeria’s naira fell to a new range of between N274 to N280 in volatile dollar trades on the unofficial market on Thursday, after local lenders cut the amount individuals traveling abroad can spend on their bank cards, traders said.

The naira has been hitting new lows among retail bureaux de change operators on renewed drop in oil prices and the Central Bank’s efforts to curb demand to conserve its dwindling foreign reserves.

The dollar hit a 2-week high against a basket of currencies, making oil and other commodities denominated in the greenback less affordable to users of the euro or naira among others.

Oil prices fell as much as 2 percent on Thursday, with Brent trading not far from 11-year lows.

Brent, the global crude benchmark, was down 20 cents at $37.19 a barrel, trading less than $1 above its 2004 low.

The biggest problem for emerging markets right now is the decline in commodity prices, according to Charles Robertson, Renaissance Capital’s Chief economist and Head of Macro Strategy.

“From Russia to Kazakhstan to South Sudan and Argentina, emerging markets are responding by letting markets decide the most appropriate level for the currency,” Robertson said. 

“The Fed rate hike and the promise of more to come contrasts with a preference to cut rates in Europe and Japan.  So we imagine the US dollar will continue to strengthen – and this is an additional challenge for central banks.”

Policymakers expect only “gradual” future increases in the federal funds rate after Wednesday’s move, the Fed said in a statement. It added that given the current shortfall in inflation, compared with its 2 per cent target, it would “carefully monitor actual and expected progress” towards its inflation goal.

Median interest-rate projections from the central bank’s policymakers suggested rates could rise by another 100 basis points in 2016.

That would put additional pressure on the beleaguered naira.

PATRICK ATUANYA