FSDH

Nigeria, China currency swap’ll widen local trade deficit – FSDH

The recently signed bilateral currency swap agreement between the Central Bank of Nigeria and the People’s Bank of China will increase Nigeria’s trade deficit with China, according to FSDH Research’s monthly Economic and Financial Market Outlook dubbed Local Competitiveness and Currency Swap Deal.

The deal is worth about $2.4bn, that is 15 billion Renminbi (RMB) or N720bn in local currencies. The trade is expected to reduce the demand for United States dollar by Nigerians importing from China and consequently strengthen the value of the naira. The deal will reduce certain barriers for Nigerian importers of goods from China and reduce the cost of transactions in multiple currencies.

FSDH Research stated, “Analysis of the trade relationship between Nigeria and China in the last five years shows that Nigeria has a negative trade balance with China. While we believe the currency swap agreement may improve foreign exchange stability and aid external reserves management to a certain extent, it has some downside risks. The fact that it removes some trade barriers between the two countries may increase Nigeria’s imports from China. This development, without a corresponding increase in “Nigeria’s exports to China, will increase Nigeria’s trade deficit with China. Nigeria needs to develop competitive advantage in the production of certain exportable goods that China currently imports in order for Nigeria to get the full benefits from this currency swap deal.”

FSDH also expects a 3.55 per cent Gross Domestic Product growth rate in Q1 2018 as the Purchasing Managers’ Index expands

The PMI survey published by the CBN for the month of April 2018 showed an expansion. The Manufacturing PMI in the month of April stood at 56.9 points from 56.7 points recorded in March. Similarly, the Non-Manufacturing PMI improved to 57.5 points from 57.2 points in March.

FSDH Research expects a GDP growth rate of 3.55 per cent in Q1 2018, adding that, “This positive recovery in the economy should drive credit creation, both in the manufacturing and non-manufacturing sectors.”

The improved macroeconomic environment in the Nigerian economy strengthened the foreign exchange inflows and boosted the external reserves in April 2018. The favourable developments in the crude oil market and consistent inflows from the Investors’ and Exporters’ Foreign Exchange Window (I&E Window), according to the report, were the major inflows into the external reserves. The 30-day moving average external reserves increased by 2.66 per cent to $47.49bn as at end-April, 2018, from $46.26bn at end-March.

FSDH Research also forecast a further drop in inflation rate to 12.43 per cent in April 2018. “We expect the inflation rate to drop to a single digit in July 2018 provided there is no food shortage in the country on account of the current rising crisis in the food producing areas in the country,” it added.

On the financial market performance, it said, “The sharp drop in the yields in the Nigerian Treasury Bills in the last few months raises a question if the yield on 364-Day NTB will drop to a single digit, the first time since 2011. The average yields on the 364-NTB remained in single digit figures between 2008 and 2010 while inflation rate during this period was in double digit figure leading to negative real yields.

“The CBN adopted a devaluation strategy during the period in reaction to the drop in oil price. The drop in oil price also led to a consistent drop in the external reserves. However, the GDP growth rate remained strong during the period partly on account of GDP rebasing exercise.

“The equity market depreciated for the third consecutive month in April 2018. Month-on-month, the Nigerian Stock Exchange All-Share Index depreciated by 0.57 per cent (a loss of 0.59 per cent in dollars) to close at 41,268.01 points. Year-to-Date, the Index recorded a gain of 7.91 per cent. Similarly, the market capitalisation recorded a MoM loss of 0.30 per cent (a loss of 0.31 per cent in dollar) to close at N14.95tn ($48.91bn).”

The outlook for the equity market, it explained, remained positive as both economic and financial developments support recovery in the equity market.