Higher interest rate ‘ll attract foreign investors, says Coronation

Nigeria needs to offer a higher interest rates than it is currently doing to attract foreign investors seeking better returns, Coronation Research, said yesterday.

In a report titled: 2018 Interest rate outlook, the research arm of Coronation Merchant Bank Group, examined the current yield on government-issued or Central Bank-issued one-year bills.

Issuances from emerging market/developing countries such as Brazil, Russia, India and China (BRIC) countries; selected emerging markets with double-digit inflation and, selected sub-Saharan African countries were the target.

It said Nigeria also needs to lock in domestic funds that might otherwise go to the foreign exchange market. “Rather than have market interest rates trend down with inflation, we believe that in second half of 2018 the Central Bank of Nigeria (CBN) will seek to increase the spread between inflation and the one-year risk-free rate, which it effectively sets with its Open Market Operation-OMO rate,” it said.

The report said conditions for emerging market currencies have deteriorated in the last two months, adding that while the crisis in the Argentinian Peso is an extreme example, few emerging markets can take their exchange rate for granted and in some cases market interest rates have risen.

“Countries such as Kenya and Egypt, that offer one-year risk-free local currency yields in excess of 5.00 percentage points (pp) above inflation, have had the best experience of preserving their foreign exchange rates over the year. Nigeria offers a one-year risk-free rate of 0.72 percentage point over its inflation rate.  In as much as the Central Bank of Nigeria (CBN) wishes to keep interest rates down, we believe that it will have to raise market interest rates by fourth quarter 2018,” it said.

It said the CBN is aware of the risk of outflows of foreign investment in Naira money market instruments and the threat of pre-election spending that will most likely feed through to inflation in second half 2018.

“For these two reasons we think that the CBN will raise its open market operation (OMO) rates to achieve an annual yield of 14 per cent to 15 per cent by fourth quarter 2018, from 13.20 per cent per annum (pa) recently.