Nigerian instruments, particularly the Federal Government (FGN) bonds will attract more investments as inflation rates recede with the flood.
The investment climate is expected to be more inviting with interest rates expected to slow considerably or moderate as analysts predict that inflation may slow to a single digit within the first quarter on account of lower food prices.
Inflation, a measure of the average growth in the prices of goods and services within a period of time affects the value of investment, depending on the side the inflation pendulum is swinging. A stable inflation will guarantee investment amounts remain stable, a volatile one gives investors goose pimples as it is capable of eating into their investments or grow its value.
But with the effect of the flood easing analysts are almost sure that the rate will recede. Their assumption is based on the fact that the prices of food, which constitutes nearly 52 per cent of the Consumer Price Index (CPI) will decelerate this year, at least until another threat of flood comes.
They told Leadership that over all, the economy will experience growth.
Wale Abe, chief executive officer of Financial Market Dealers Association of Nigeria (FMDA) said if inflation slows, then interest rates will come down. According to him, when that happens, the impact of inflation receding will now have a multiplier effect on the economy as a whole.
For instance, more firms could borrow more money at lower interest rate, and this will in the long run create more jobs, thereby helping to reduce unemployment rate.
Also, he said a benign inflation will attract more foreign investment since the value of investments will be stable. Abe said when this happens, there will be enough dollars in the system to guarantee a stable naira.
Abe added that more people will begin to save more money because they are sure the value of their monies in banks' vault will not shrink as a result of inflation. That will also means that banks will have more money to lend out.
Thus based on the expected benign economic environment this year, analysts expect that when the Central Bank of Nigeria (CBN)'s Monetary Policy Committee (MPC) meets this week, there will be little reason to tighten its monetary stance.
"Our expectation is that the MPC will maintain rates at the current levels", said FSDH analysts.
As the floods beat a retreat, it appears inflation rates are also taking a cue, with year-on-year (y/y) slowing from 12.3 percent in November to 12.0 per cent December, 2012 indicating a 30 basis points (bps) decline.
One reason the central bank will decide to keep the rates on hold is because the prices of major component of inflation - food and non-alcoholic beverages has come down, and with the flood scare over, there are hopes that inflation may continue to decelerate.
In fact some analysts believe that inflation may come down the so much desired single digit figure early this year.
The National Bureau of Statistics (NBS) announced last week that headline inflation has dropped moderately to 12.0 per cent y/y in December from 12.3 per cent y/y in November last year although it still exceeded the 11.7 per cent y/y recorded in October.
There are however some concerns because consumer prices increased 0.8 per cent month-on-month (m/m) in December from 0.6 per cent m/m in November but from 0.9 per cent m/m in October, which appears to suggest that inflation has remained contained in monthly terms, and rose at a marginally slower pace than the historical average in December (0.9 percent between 2006 and 2011). That may be as a result of other factor than just food made in Nigeria.
For instance, Samir Gadio, economic analyst with Standard Bank, London said food inflation which accounts for 50.7 per cent of the Consumer Price Index (CPI) basket fell to 10.2 per cent y/y in December, from 11.6 percent y/y in November and 11.1 per cent y/y in October, which was influenced by high base effects in December 2011.
But on a month-on-month basis, overall food inflation reached 1.0 per cent in December, from 0.7 percent in November and 1.0 per cent in October. While the recent floods moderately pushed up food inflation earlier in the fourth quarter of 2012, the lagged impact on farm produce prices appears to have subsided in December.
But Gadio said, within the same period, imported food inflation inched up. Imported food inflation which accounts for 13.2 percent of the CPI basket rebounded slightly to 9.8 percent y/y in December, from 9.7 percent y/y in November, but was still well below the 15.6 percent y/y hit in Oct.
"We see annual imported food inflation reverting to double digits over the next few months because of low base effects in the January 2012 time series. While the monthly imported food CPI time series have generally been highly volatile, this has been less the case lately, with m/m inflation in this group rising 1.0 per cent in December, from 0.7 per cent in November and 0.8 percent in October", said Gadio.
Razia Khan said the fall in food prices was a little of a surprise to her. "Food prices, perhaps somewhat surprisingly, appear to have decelerated (in y/y terms) for the first time since the onset of the flooding. We will have to see how long-lasting this is, especially given that much of it was driven by a base effect. In m/m terms, the food index was still up a pretty hefty one per cent", she said.