Likely hit From Fed Tapering on the Financial Accounts

January 17, 2022/Proshare

by FBNQuest Research 

Today, we conclude our series on Nigeria’s balance of payments (Good Morning Nigeria, 11 & 12 Jan ’22) by turning our attention to the financial accounts. Our chart below shows that the financial account swung to a net surplus of USD2.6bn or 2.3% of GDP in Q3 ’21 from a revised net deficit of -USD235m in Q2. Recovery in the financial account was widely expected (Good Morning Nigeria, 26 Nov ’21), and was a direct result of the IMF’s USD3.35bn special drawing rights (SDR) allocation to Nigeria, and the USD4bn raised by the federal government from the Eurobond, both of which occurred in August and September ’21.

Net financial liabilities (inflows) increased by over USD10bn during the quarter to USD11.9bn in Q3 ’21, representing the largest capital inflow (through the financial accounts) into the Nigerian economy since Q1 ’19.

Even if we adjust for the USD3.3bn from the SDR and the Eurobond issue, the adjusted capital inflow of cUSD4.5bn is still higher than USD1.8bn that came into the economy in Q2 ’21.

Portfolio investments recorded a healthy net inflow of USD7.5bn, mostly due to an inflow of c.USD7.4bn in debt securities, a portion of which can be attributed to the USD4bn Eurobond issuance during the quarter. This compares with a net outflow of USD202m in Q2 ’21.

Looking ahead, we are likely to see a deterioration in the financial accounts, as financial conditions tighten globally, due to the tapering and interest rate hikes by the US Fed and the central banks of leading economies.

These measures, as well as indications that the US Fed may start to shrink its balance sheet later this year, may lead to capital outflows from emerging market economies as well as the depreciation of their currencies.

Following the expected drop in foreign capital inflow, there are concerns about the financial accounts’ ability to cover current account deficits in the near term. The prevailing high level of crude oil prices, as well as better forecasts for crude oil production output, bode well for both the trade and current account.

Proshare Nigeria Pvt. Ltd.

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