17 March 2017

Nigeria: U.S Fed Rate Hike Will Increase Govt's Debt Service, Reduce Portfolio Investment

Lagos — Financial analysts have suggested that the rise in the United States monetary policy rate will increase the debt service burden of the federal government and reduce Foreign Direct Investment (FDI) flow into the country.

The federal increased the US policy rate by 25 basis points to a target range of 0.75%-1% p.a. The impact of the rate was a slight increase in the value of the dollar and an expectation of a fall in oil prices.

Similarly, the Bank of England's Monetary Policy Committee (MPC) at its meeting ending on 15 March 2017, voted by a majority of 8-1 to maintain Bank Rate at 0.25%. The Committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, totalling up to £10 billion.

Analyst at the Financial Derivative Company Limited (FDC) said the bad from the increase is that: "Higher US rates increases FG debt service burden and a stronger US dollar implies lower oil price.

"Domestic commodity prices remained flat in spite of downward pressure owing to naira appreciation. We expect prices to slide as soon as current inventories are depleted and replacement cost pricing kicks in."

Mr Muda Yusuf, the Director General of the Lagos Chambers of Commerce and Industry in his reaction said, if the rate goes up there, it reduces the flow of funds to our economy. The return on investment offered by the United States and the United Kingdom either increase or reduces our ability to attract investment. "We attract more investment, if the rate in those climes are not so good."

Yusuf said, What we are likely to see is the change of direction especially for portfolio investors.

Lukman Otunuga, a research analyst at FXTM said: "Although US interest rates were increased as widely expected, the cautious tone Janet Yellen adopted in the press conference coupled with the unchanged projections on the dot plot has quelled expectations of four US interest rates increases this year."

He argues that, Regardless of the sharp selloff, the bias towards the Dollar remains bullish amid the improving sentiment towards the U.S economy and as such may impact emerging markets like Nigeria.


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