US interest rate hike expectations ‘punishing’ the naira

Lukman Otunuga, research analyst at FXTM, says the expectations of a rate hike by the US federal reserve has continued to punish the Nigerian naira, as the dollar bulls.

Reacting to Nigeria’s GDP numbers, Otunuga said oil, as the lifeblood of the Nigerian economy, which has been on the low, is driving a classic case of stagflation in the country.

“The fragile sentiment towards the largest economy in Africa was dealt a frightening blow on Monday following its soft third quarter GDP figure of -2.2%, which revived concerns of slowing economic growth,” he said.

“2016 has been a tough year for the nation with its lifeblood known as oil trading to painfully low levels amid the oversupply woes while a resurgent Dollar from heightening US rate hike expectations continues to punish the naira.

“With inflation and unemployment skyrocketing out of control but economic growth on a steady decline, fears have elevated over a classic case of stagflation.”

Otunuga, who says Nigeria is on a quest to economic stability via diversification, says the CBN may intervene in the short term, to quell inflation or drive growth.

“Although it remains widely known that Nigeria is on a quest to reclaiming economic stability via diversification, it is becoming quite clear that the nation continues to be entangled in a fierce battle with external risks in the shorter term.

“It seems likely that the Central Bank of Nigeria (CBN) intervenes in the near term by either raising interest rates to quell inflation or pursing growth enhancing fiscal policy in an effort to reviving growth.

“Although the short term outlook for Nigeria is bearish it must be kept in mind that the steps have already been taken to steer away from the curse known as oil reliance. There is an increasing focus on agriculture, while infrastructure and investments in other non-oil sectors could provide positive results in the future.

“While there is a possibility that things may turn for the worst before improving, Nigeria has repeatedly displayed instances of resilience against the storm with this structural transition if successful potentially exceeding all expectations.”

As the US mulls interest rate hike, the naira has been on the decline, trading at 465 per dollar at the parallel market, and 316 at the official side of the market in Lagos on Wednesday.