Mr. Lukman Otunuga is Research Analyst at Forex Time, FXTM, a global online foreign exchange broker, specialising in forex trading, stocks, commodities and spot metals. In this interview with Michael Eboh, he talks on a wide range of issues on the Nigerian and global financial and currency markets and the implications of some of the economic policies of the Federal Government and the monetary policies of the Central Bank of Nigeria, CBN, on the economy and lives of the people. Excerpts.
Can you give us an overview of the international and local financial markets and their impacts on the lives of individuals, countries and the world in general?
The global markets have been flung onto a chaotic rollercoaster ride in 2016 as the ongoing concerns over slowing global growth, depressed oil prices and persistent Brexit uncertainties have weighed heavily on investor sentiment.
Stock markets started the year pressured, but have been surging higher on hopes of potential stimulus measures while risk aversion continues to keep Gold buoyed.
Expectations continue to heighten over the Federal Reserve raising US rates in 2016 which has bolstered the Dollar consequently sending shockwaves across the globe. The wild movements in the financial markets have had an impact on individuals, businesses and even central banks. With the global landscape negatively warped by uncertainty and anxiety, risk aversion could encourage investors to flock to safe-haven safety.
Do you think the recent exit of Britain from the European Union, EU, would negatively or positively affect the Nigerian foreign exchange market and the economy in general?
It should be kept in mind that the impact of the recent Brexit outcome goes far beyond the borders of the UK economy and most other nations may potentially feel the burn. With Nigeria being a member of the British Commonwealth, the negative impacts of the Brexit could indirectly have an effect on the Nigerian economy. Fears have already heightened over a potential Brexit fuelled economic slowdown in the UK economy and this could cause a decline in the amount of foreign investment towards Nigeria.
Naturally a decline in external investment may punish Nigeria’s GDP growth while potentially reinforcing further pressures on the nation, which is currently entangled in a losing battle with depressed oil prices. Although the persistent post Brexit uncertainty has heavily weathered the value of the Sterling, it is still somewhat stronger than the vulnerable Naira.
What other international occurrence(s) do you see impacting Nigeria’s currency market?
The combination of declining oil prices and a resurgence in the Dollar could leave the Naira vulnerable to further losses in the future. It must be remembered that Nigeria still remains heavily dependent on oil export for a chunk of its government revenues while the value of the Dollar has a strong impact on Nigeria’s currency markets. Oil prices have been depressed for an extended period and the oversupply concerns could haunt investor attraction consequently weakening the Naira further. With expectations heightening over the Federal Reserve raising US rates in 2016, the increasing Dollar could make Nigeria imports more expensive, ultimately weathering the Naira even more.
What are your assessments of the Central Bank of Nigeria’s, CBN, recently introduced flexible foreign exchange regime and what do you think are the implications for the Nigerian economy?
Sentiment towards the Nigerian economy was uplifted following the Central Bank of Nigeria’s decision to de-pegging the Naira against the Dollar in a bid to bolster economic growth. For an extended period, depressed oil prices eroded the nation’s government revenues while the previous Dollar peg rapidly diminished reserves which simply punished Nigeria further.
With concerns elevated over a slowdown in domestic economic growth, the Central Bank of Nigeria may have taken the right steps to act consequently alleviating some fears. Although there are anxieties that the Naira depreciates to painful levels as the natural forces of supply and demand determine the equilibrium value, this could attract foreign investors. The short term pain from the initial devaluation may be dwarfed by the long term benefits which could promote future economic stability and growth.
Nigeria recently signed a currency deal with the Chinese government. Do you consider this deal to be beneficial to Nigeria? What do you think will be the implication in the short, medium and long term?
Nigeria entered a currency swap deal with China in an attempt to reduce the persistent pressure on the demand for the Dollar. This deal was enforced to aid businesses that traded with China as over 70% of Nigeria’s imports come from China.
With the possibility of an increased ease for manufacturers to do business with China on the back of the currency swap deal, some demand for the Dollar could be reduced. Although there may be concerns over the People’s Bank of China intervening to devalue the Yuan in the medium term, this could reduce some pressures on the Dollar demand in the longer term.
Do you see the economic policies of the present administration bringing about a stronger naira, an increase in the country’s foreign reserves and an even stronger economy?
The current policies that have been enforced by the present administration are aimed at diversification with the intent to steering away from being heavily oil export dependent. Efforts in revitalizing the agricultural sector, fixing the infrastructure and even expanding taxation could have a positive impact on the Nigerian economy in the future.
Once the nation succeeds in its tough mission to diversify, it automatically becomes self-reliant consequently boosting GDP. With economic growth potentially stabilizing post diversification, the country’s foreign reserves should increase while the improved investor risk appetite towards Nigeria should naturally cause the Naira to appreciate on the free floating currency exchange.