Fed tapering is flushing out hot money to Nigeria
The withdrawal of US stimulus has removed some potentially destabilising "hot money" flows to Nigeria, but monetary policy needs to stay tight to keep the naira stable, a deputy governor of the central bank said. While the Nigerian currency has fallen below its 150-160 per dollar trading band, it has remained relatively stable in the recent emerging market sell-off, Kingsley Moghalu told Reuters in an interview in London on Tuesday.
Copyright Reuters, 2014
"Fed tapering was bound to lead to some reversals of capital flows, we have factored this in our planning," Moghalu said, adding that quite a large proportion of the country's $43 billion foreign exchange reserves consisted of speculative capital. "There is still hot money in Nigeria." Like other emerging markets Nigeria's higher yields compared to developed markets attracted some of the cheap money flows unleashed by the US Federal Reserve's stimulus programme, which is now being scaled back.
The African country became a magnet for so-called "carry trades", in which investors borrow money in low-yielding markets to invest in higher-yielding ones. "The first function of our monetary policy is not to promote the carry trade, it's a by-product," Moghalu said, speaking on the sidelines of an event to launch his book "Emerging Africa". Concerns that inflows to emerging market assets could now reverse as the Fed trims stimulus have triggered a sell-off in emerging markets in the past few days. For Nigeria, a weaker naira would run the risk of importing inflation, hence the need for a tight monetary stance, Moghalu said.
"We remain committed to currency stability. If you compare our currency with a number of other emerging market currencies ... our stability performance has been quite good," he said. "At this point in time, in the near and medium term, it is necessary to maintain a tight monetary policy." Nigeria's central bank left its benchmark interest rate at 12 percent for the 14th time in a row last week but tightened the cash reserve requirement on public sector deposits to 75 percent, from 50 percent, to support the naira.
The naira fell 1.7 percent on Monday to its weakest level against the US dollar in four months at 162.50, defying central bank actions to defend it. But Moghalu said Nigeria's currency had remained relatively stable compared with currencies such as the South African rand , and that the removal this week of restrictions on the amount of dollars that banks could sell to bureau de change outlets would help it return to its target band.
Inflation is ticking up in Nigeria, reaching 8 percent year-on-year in December, but Moghalu said he expected inflation to end the year within the central bank's 6-9 percent target range. "By end-2014, I would still hope we can keep inflation under 9 percent," he said. "By 2015-2016, we hope inflation will come down to about 5 percent." The central bank forecasts that Nigeria's economy will grow 6.8 percent this year, Moghalu said, in line with the government's forecast in its budget.
In addition to global factors, investors have become more nervous about Nigeria due to uncertainty surrounding presidential elections next year. Highly respected central bank governor Lamido Sanusi is also to stand down in June at the end of his term, adding to worries about a power vacuum. Moghalu is one of several names suggested as Sanusi's successor. He declined to comment on his possible candidacy, but said worries about the succession were unfounded. "Governors will come and serve their term ... the central bank remains committed to discharging its responsibilities, especially in the area of monetary policy."