Analysts Highlight Opportunities in Nigeria-China Currency Swap Deal


By Obinna Chima

The $2.5 billion bilateral currency swap deal recently signed between the Central Bank of Nigeria (CBN) and the People’s Bank of China (PBoC) will impact positively on the Nigerian economy, analysts at FSDH Merchant Bank Limited have stated.

The deal signed in Beijing by the CBN Governor, Mr. Godwin Emefiele and the PBoC Governor, Dr. Yi Gang, was worth 16 billion Renminbi (RMB) or N720 billion.

In its latest Economic and Financial Market Outlook report for April titled: “Local Competitiveness and Currency Swap,” the investment bank said the deal was expected to reduce demand for the United States dollar by Nigerians who import goods from China and consequently strengthen the value of the naira.

According to the report, the deal would also reduce certain barriers for Nigerian importers of goods from China and reduce the cost of transactions in multiple currencies.

This, according to the firm, would also lead to stability in the

foreign exchange.

It pointed out that FSDH’s analysis of the trade relationship between Nigeria and China in the last five years showed that Nigeria had a negative trade balance with China.

The report said: “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.”

Also, the FSDH report predicted a 3.55 per cent growth rate in the country’s Gross Domestic Product (GDP) in the first quarter (Q1) of 2018 as the Purchasing Managers Index (PMI) expands. According to the report, the anticipated positive GDP was expected to drive credit creation, both in the manufacturing and non-manufacturing sectors.

“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.  The expansion in the PMI is an indication of the growth that FSDH Research expects in the economy in the short-to-medium term,” it said.

While noting that the improved macroeconomic environment in the Nigerian economy was also expected to boost foreign exchange inflows and the external reserves in April 2018, the Head of Research, FSDH Merchant Bank, Ayodele Akinwunmi, pointed out that favourable developments in the crude oil market and consistent inflows from the Investors’ and Exporters’ Foreign Exchange Window (I&E Window) werethe major inflows into the external reserves.

On inflation, the firm  forecast a further drop in inflation rate to

12.43 per cent in April 2018 and expected the inflation rate to drop to a single-digit by 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.

The report  further stated: “The sharp drop in the yields in the

Nigerian Treasury Bills (NTBs) 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.”

It anticipated that yields on FGN Bonds may increase from the current levels, saying the federal government may increase borrowing to fund the 2018 budget when it is passed.

Advising on income investment strategy for the month of May, FSDH said investors should take advantage of the current yields on the one year Treasury Bill and consider taking position in some corporate bonds in the market that have attractive yields and good names.

It advised investors to re-align their portfolios by investing more in corporate bonds from the secondary market.

The report equally showed that the outlook for the equity market

remained positive as both economic and financial developments support recovery in the equity market.