E-Financial
Nigerian Economy expands in 2018; Presidential elections loom
By Jameel Ahmad, FXTM Global Head of Currency Strategy and Market Research,
Confidence over the health of the Nigerian economy was slightly elevated this morning after official reports showed that economic growth expanded in 2018.
Gross domestic product in Africa’s largest economy rose 1.93% last year, compared to the tepid 0.8% in 2017. With fourth quarter economic growth also printing stronger than expected at 2.38% in real terms YoY, Nigeria seems to be gaining economic momentum. However, with the nation’s fortunes still closely linked to Oil markets, growth could be threatened this year if Oil prices continue to depreciate.
It will be a monumental week for the Nigerian markets as presidential elections loom. Although the Naira was stable against the Dollar yesterday at N358 in the parallel markets, there could be some volatility this week due to election uncertainty.
USD rally takes investors by surprise; but will the winning streak be able to continue?
A key overhang for the Dollar may be clearing up after US lawmakers announced they have a deal in principle to avoid another US government shutdown this weekend. However, President Trump’s approval is still required before the spending bill can go through.
At the time of writing, the DXY is holding marginally close to 97, having posted gains over the last eight consecutive days – its longest winning streak since 2016. This recent run of form certainly goes against initial expectations for muted Dollar strength this year given the Federal Reserve’s recent U-turn on US monetary policy.
There is a likelihood that central bank policy in the form of the Federal Reserve is not the catalyst behind the USD rally. It probably doesn’t have anything to do with the U-turn from the Fed a few weeks ago either. Investors are possibly thinking that “no news” when it comes to the ongoing US-China trade talks is not necessarily an example of “no news is good news” for this environment of trade tensions. The threat can’t be understated that the United States will pull the trigger on extra trade tariffs on Chinese goods at the beginning of March. We saw throughout the second half of 2018 that market anxiety over trade tensions pushed the Dollar higher against its global counterparts, and it wouldn’t be that much of a surprise if recent history repeats itself – if there is another escalation in the trade tariff world.
According to the Bloomberg terminal, spot returns for G10 currencies against the stronger Dollar since January 30 have experienced a clear sea of red in favour of the USD. This is following the euphoria that was created when Fed Chair Jerome Powell signalled the need for “patience” when it comes to the potential of hiking interest rates in the United States.
(Source: Bloomberg Terminal)
What else is driving the Dollar train higher?
Another perspective on what could potentially be driving the USD higher is the lure towards the Greenback being amplified by ongoing praises for the US economy. At the same time, it has become a strain to market headlines that counterparts to the United States throughout a range of developed and emerging markets are highlighting downside risks to their respective economies.
Those who are fatigued from yo-yo trade headlines in the market might be inclined instead to align their mindset to the return of economic and central bank divergence between the United States, and pretty much everywhere else. This ultimately supports the prospects of a stronger Dollar.
What data to look out for next and what could this mean to interest rate policy?
Markets will look to this week’s US January CPI reading as the next test of the Fed’s data dependence. Following that, attention will turn to next week’s release of the FOMC January 30 meeting minutes for potentially further clues on what could have encouraged the Fed’s recent pivot.
The current stance on US interest rate policy is expected to, in turn, allow other central banks to take a pause on tightening monetary policy. With central banks worldwide either standing pat or moving towards another round of a potential easing bias, investors may have less impetus to part with their current darling, the Dollar.
The dovish outlook on global monetary policy, coupled with further positive indicators of US economic strength, should support the Dollar’s attractiveness and this could mean DXY returning to its recent high of 97.54 achieved in November 2018.
Remember a positive conclusion to trade talks would be seen as Dollar-negative
However, this isn’t to say that demand for the Greenback will continue unabated in the near term. Traders should not be looking at the USD as one-way traffic going higher up the charts by any means.
While the US government shutdown may have been averted, markets are also having to contend with this week’s crucial talks in Beijing surrounding US-China trade tensions. Both countries are nearing the end of the 90-day truce and in the event that President Trump pushes through with hiking tariffs on Chinese goods come March 2, that will be seen as a potential trigger to give the US dollar another leg up.
Although given the political and economic pressures that are at risk of creating headwinds to the world’s two largest economies, markets are holding out hope that a deal would be struck sooner rather than later. This would be viewed in the market as a potentially Dollar-negative outcome.
Should key deals be approved in Washington (to fund the US government) and in Beijing (to avert a tariff hike), these will be viewed as the catalysts for risk-on sentiment to return to the fore. Meaning that this would be a significant driver behind potentially higher global equity markets, improved demand for emerging markets and commodities like Oil.
It would however be seen as a risk to the relentless Dollar rally that has taken place over February.
Where do Emerging Markets stand in the currency environment?
Yet amidst this winning streak against G10 currencies, the US dollar has seen mixed results against emerging-market currencies during the same period.
(Source: Bloomberg Terminal)
Some of these EM currencies that posted gains against the Greenback are coming back from oversold positions last year, and are supported by factors such as resilient domestic economic fundamentals, foreign fund inflows, and rebounding commodity prices.
However, EM currencies are still exposed to major events that can sway global risk sentiment, such as US-China trade tensions, Brexit uncertainties, and slowing global growth. China’s moderating economic conditions remain a major overhang for the global growth narrative, and the slowdown may be felt in many emerging economies via the trade and FX channels.
Ultimately, EM currencies will likely be dictated primarily by the broader US dollar theme, and whether the Greenback can build on its one percent climb so far in 2019.
Nigerians have more trust in Bitcoin-based systems than in traditional alternatives such as banks and government, a new report by Elastos, an open-source blockchain website, has stated.
According to its inaugural BIT Index (Bitcoin; Innovation & Trust), emerging markets are driving the adoption of Bitcoin, with Nigeria and the UAE leading the charge.
The report revealed that 66 per cent of Nigerian respondents and 35 per cent from Brazil had more confidence in Bitcoin-based systems than alternatives like banks or national governments, compared to just 16 per cent in Germany and 21 per cent in the UK.
The survey also revealed that 20 per cent of Nigerian consumers use Bitcoin to conduct transactions at least once a day, while 67 per cent would have more trust in Bitcoin to protect their life savings than traditional services like banks, local governments, and cash.
According to the platform, the research was compiled from online interviews conducted with 1,407 self-defined ‘tech savvy’ respondents in Brazil, Germany, Nigeria, South Korea, the UAE, the UK, and the US.
It stated that the interviews were completed by a third party, a registered market research company, between March 30 and April 4, 2024.
“When it comes to ensuring the integrity of online transactions, emerging market respondents also revealed their relative confidence in Bitcoin compared to alternatives,” it indicated.
According to the report, 66 per cent of Nigerian respondents and 35 per cent of Brazil have more confidence in Bitcoin-based systems than alternatives, such as banks or national governments, compared to figures of just 16 per cent (Germany) and 21 per cent (UK) who feel the same.
Meanwhile, Jonathan Hargreaves, Elastos’ global head, Business Development & ESG, described the BIT Index’s inaugural findings as indicative of the role the ‘global south’ was playing in the adoption of decentralised currencies such as Bitcoin.
“The BIT Index offers a fascinating and sobering insight into the industry. The fact that over two-thirds of Nigerian consumers and a third of their counterparts from the UAE and Brazil would feel more confident entrusting their life savings to Bitcoin rather than traditional financial instruments speaks volumes about the protagonism these regions are already playing.
“In many instances, the driving factor is the absence of viable, accessible alternatives to, for instance, conduct cross-border transactions or mitigate the impact of inflation,” he said.
According to Chainalysis, a cryptocurrency research firm, Nigeria’s crypto transaction volume grew year-over-year to $56.7bn in 2023.
It stated that the country’s crypto economy continued to grow despite market turmoil in the space.
On the contrary, the government has been taking strong measures to restrict and clamp down on cryptocurrency exchanges and platforms operating in the country.
Central Bank of Nigeria (CBN) has awarded the country’s second Payment Terminal Service Aggregator (PTSA) license to Unified Payments, Nigeria’s premier financial technology company, following a rigorous and transparent process,
The move is targeted at enforcing existing requirement that all transactions from point-of-sale channels in Nigeria must go through a licensed Payment Terminal Service Aggregator (PTSA).
The CBN is enforcing the laws to clamp down on financial crimes and other market misconducts and it aligns with the CBN’s objectives to fully track all electronic transactions in Nigeria, given the propensity of using such transactions to fund insecurity, violent crimes, banditry, kidnapping as well as other vices.
According to one analyst, “By awarding a second PTSA license, the apex bank has proactively responded to industry operators who had expressed serious concerns about channelling all transactions through a single aggregator, the Nigeria Interbank Settlement System PLC (NIBBS), as has been the case for some years.
“With the new policy direction, payments service providers would henceforth route all transactions through either of the two licensed Companies.”
Other financial analysts and industry players have commended the Central Bank, affirming that “the move can be a massive step in the right direction. They also commended the open, transparent, and inclusive manner via which the selection process was managed, and the license awarded.
“The selection process, which lasted for months, began with an invitation for qualified organisations within the payment industry to submit an Expression of Interest document, alongside other requisite documentation and additional capital requirement of N1 billion.”
The new management of CBN decided not to give the license out without going through an open process – and for the first time in licensing a payment service provider – the apex bank went through a public bid process outlined in its publication of Friday, January 5, 2024, in different national newspapers. At the end of the process, Unified Payments emerged as the most preferred service provider.
Unified Payment Services Limited, also called Unified Payments or UP, is a shared service provider within Nigeria’s financial technology sector owned by a consortium of Nigerian banks. For over 26 years, the firm has provided payment technology to banks and other industry operators. The first and only non-bank entity that is a principal member and licensed acquirer of all of American Express, Mastercard, Visa, UnionPay and Payattitude. Unified Payments facilitates both local and international transactions.
Formerly known as ValuCard Nigeria Plc, Unified Payments led the way to introduce POS payments in Nigeria under its card scheme known as ValuCard which is the first payment card to be issued in Nigeria. The company later transformed into a scheme-neutral and option-neutral service provider enabling transactions under different schemes.
The company has continued to provide leading payment technologies and services, enabling different operators to leverage its capabilities and licenses, enabling prompt and seamless transactions.
Among the shareholders of Unified Payments are First Bank, Access Bank, United Bank for Africa (UBA), Guaranty Trust Bank Plc, Zenith Bank and Fidelity Bank. Other shareholders are Citibank Nigeria Limited, Ecobank of Nigeria Plc, First City Monument Bank Plc, Keystone Bank Ltd, Polaris Bank Ltd, Stanbic IBTC Bank Plc, Sterling Bank Plc and Wema Bank Plc.
Chartered Institute of Bankers of Nigeria, CIBN, has expressed support for the ongoing banking recapitalization exercise saying it will empower banks to lend more to the economy.
CIBN President, Dr. Ken Opara stated this yesterday while speaking at the annual lecture of the institute in Lagos, with the theme “Improving Availability of Credit in the Nigerian Real Economy: The Critical Importance of Liquidity.”
Okpara noted that the volume of credit to the real sector activities namely agriculture, manufacturing and services is low compared to their critical role in driving economic growth.
Consequently, he called for more credit to the real sector, saying, “I propose that we consider offering more credit to these key sectors and particularly the agriculture sector. It is for this reason that the Recapitalization exercise is a welcome development.
“The recently announced upward review of the Minimum Capital Requirements of Nigeria by the Central Bank of Nigeria would further empower banks to extend more credit to the economy’s productive sectors.”
To address these factors impeding credit to the real sector, Okpara suggested that, “The government needs to improve further the ease of doing business and infrastructural development, such as power, roads, rail networks, etc.
“Setting up industrial centres where these companies can co-habit and share common infrastructure. Harmonize and reduce the various taxes and levies, including locating them in a single hub.
“Banks need to be deliberate in de-risking these companies via Capacity building programmes, and Advisory services.
Specialised Financial Institutions can be created in addition to the Bank of Industry (BOI), especially credit guarantee agencies and risk-sharing institutions, to further facilitate the deepening of credit as practiced in countries such as China which significantly transformed its economy.
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