Fed rate cut to boost Nigeria’s capital inflows

Nigeria is expected to be among the emerging markets that will attract significant foreign capital inflows following a potential rate cut by the US Federal Reserve in September.

The latest indication of a rate cut was provided by Federal Reserve Chair Jerome Powell during the Jackson Hole symposium, where he hinted at a potential monetary policy easing.

“Nigeria’s carry trade is very appealing at the moment, one of the highest in Africa. A rate cut by the US Fed is likely to support capital flows to emerging and frontier markets, which Nigeria will certainly benefit from,” Samuel Gbadebo, fixed-income analyst at CardinalStone, said.

The Federal Open Market Committee (FOMC), the monetary policy-making arm of the Federal Reserve System, has held rates steady at 5.25-5.50 percent for the seventh consecutive time. But with the US inflation within the Fed’s target, lowering monetary policy rate is not unlikely in the coming months.

Earlier this year, high-yielding government debt and cheap currency had spurred a return of carry traders at a record number into Nigeria. This was after the Central Bank of Nigeria (CBN) raised interest rates by 600 basis points. Since then, rates have been further increased by 200 basis points to 26.75 percent, driving yields on Nigeria fixed income instruments to over 20 percent.

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Ahead of the rate cut, yields on the benchmark 10-year US Treasury note in August dropped below 4 percent for the first time since 2024’s opening week. Yields were significantly lower than a 2024 peak of 4.70 percent in April, and nearly 5 percent reached in October 2023 based on the Bloomberg U.S. Aggregate Bond Index

Gbadebo said, “If you consider the intensified efforts from the CBN to enhance efficiency in the FX market, you will find that it further encourages foreign investors.”

Matilda Adefalujo, fixed-income analyst at Meristem Securities, said that the rate cut in September will make borrowing cheaper in the US to invest in other countries.

“It will be cheaper for foreign investors to borrow some funds in the US and come and invest in Nigeria and that way it’s positive for Nigeria through capital inflows,” Matilda said.

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Nigeria’s rising oil output and growing foreign exchange reserves are bolstering the economy. Nigeria, Africa’s largest crude producer, saw its oil output rise to 1.75 million barrels per day of crude and condensates in August, with state-owned Nigeria National Petroleum Company forecasting that output will rise near two million barrels a day by year end.

The country’s foreign exchange reserves at $36.5 billion are at their highest level in more than a year.

Olaolu Boboye, fixed-income analyst, explained that in the secondary market Eurobonds yields will likely decline as the instruments are priced in dollars.

“If you hold domestic factors constant and assume that it will only be influenced by external factors such as US rate cut, eurobonds yield could be lower which might encourage buying interest on eurobonds,” he said.

Victor Matthews, portfolio manager and fixed income trader at Norrenberger, said that once the cuts start, foreign investors may seek high-yielding instruments away from the US to move towards emerging economies.

Initial hopes for an Eurobond issuance this year was dashed when Wale Edun, finance minister, said the government decided to delay it and sell a debut dollar bond on the domestic market.

“Our fixed income assets such as OMO bills, our Sovereign Eurobonds and even Treasury bills will see higher subscriptions from foreign investors,” Matthews further said.