The impact of local and major global events on Nigeria’s economy is not particularly favourable this week. This is according to Lukman Otunuga, FXTM’s senior research analyst.
Otunuga, in a commentary made available to business a.m Monday, said he sees the naira- Nigeria’s currency- struggling amidst several issues arising in the course of the week.
According to Otunuga, much of this week’s focus on the economy is expected to remain on the outcome of last Friday’s Central Bank of Nigeria (CBN) policy meeting, the pending Federal Reserve meeting and coronavirus fears.
Having tweaked the Cash Reserve Ratio (CRR) to 27.5 percent from 22.5 percent last Friday, Otunuga said the Central Bank of Nigeria (CBN) action will ensure a reduction in the amount of money available for banks to lend, essentially pressuring liquidity with a goal of reducing inflation levels. He added that, ‘with the CBN on a quest to tame inflation, speculation around a rate cut anytime has been thrown out of the window.’
Outside Nigeria, the Federal Reserve, US’s equivalent of CBN, is scheduled to meet on Wednesday. Expectation, according to Otunuga is to leave interest rates unchanged. The expectation is based on a robust US labour market, moderating inflation and positive economic data. Otunuga however noted that if the Fed expresses optimism over the US economy, the dollar could appreciate, consequently pressuring the Naira.
In the commodity markets, oil prices have tumbled over 3 percent on Monday and shed more than 10 percent since the start of 2020.
Otunuga said, rising fears over the human and economic cost of the coronavirus in Asia, is setting a negative tone not just in Nigeria, but across global markets and impacting demand for oil could drag the commodity deeper in the abyss.
The analyst explained that falling oil price is significant for Nigeria, especially when considering how roughly 90 percent of export earnings and over 70 percent of government revenues are from oil exports. What is even more concerning is Nigeria’s 2020 budget which has set the benchmark for oil at $57. With brent crude currently trading at $59 and WTI Oil around $52.50, the oil revenue goal of N2.64 trillion is under threat.
Consequently, Otunuga highlighted that the appetite for riskier assets including stocks and emerging markets are likely to diminish as investors rush towards prime destinations of safety like Gold.
He said, the naira like many other emerging market currencies could weaken on renewed global growth concerns with falling oil prices adding insult to injury.
Pointing out to a likely glimmer of hope, Otunuga noted that the publication of foreign exchange reserves and manufacturing PMI data is expected at the end of this week, specifically on Friday. He said, a positive set of economic releases could boost sentiment towards the Nigerian economy.