Last year, when the United States of American economy tottered on the brink after big banks, formerly thought to be formidable collapse and the Bank of American almost fell, the United States dollar took a dive. When that happened, many governments caught cold, particularly central bank governors, and Nigeria was one. The Nigerian central bank governor, Sanusi Lamido Sanusi became a bit apprehensive because Nigeria’s foreign reserves were all domiciled in the U.S dollars, and the dollar was becoming weaker by the day.
Sanusi did what any reasonable governor would have done – diversified the risk. As we talk now, 10 per cent of Nigeria’s foreign exchange (forex) reserves is now domiciled in the Chinese Yuan. But, unfortunately, the Yuan which was immovable, highly controlled by the Chinese authorities has caved in to external pressure to allow market forces determine the Chinese currency direction.
That is another emerging problem Sanusi will have to chew over. “China loosened the trading limits for the Yuan. It now allows the currency to fluctuate up to one per cent of the reference rate set each day”, said the latest Monthly Economic News and Views at Lagos Business School
Executive Breakfast Meeting made available by the Financial Derivatives Company Limited.
According to Bismarck Rewane, Chief Executive of Financial Derivatives, the 10 per cent of Nigeria’s external reserves translates to about $3.6 billion now in Chinese Yuan and will constantly revalue.
Experts fear that the naira could run into troubled waters with the lean freedom given to the Chinese Yuan which has been held hostage for a long time now.
Perhaps the real fear is the global economic downturn being experienced by a number of countries. For instance, fund managers were notably cautious in April as risks in Europe returned to centre stage.
Rewane said, global investors trimmed their emerging market overweight from over 40 per cent to over 28 per cent and raised their cash balance to 4.7 per cent of their portfolios.
The IMF has warned that global growth will be impeded by the deleveraging at European banks and that balance sheets could shrink by as much as $2.6 trillion over the next two years.
He said before the financial crisis, there was rapid growth in cross border risks, but now, there is an almost complete reversal with French banks have left a $35 billion funding gap in the syndicated loan market in Australia.
Rewane said balance sheets are looking more patriotic, stressing there are three powerful centripetal forces driving this. These he said include politics, regulation and deleveraging. “Credit lines are evaporating and becoming more expensive”, said Rewane.
He added, “global economy becoming schizophrenic”. Apart from the gradual recovery in the U.S., there is double dip in the United Kingdom, contraction in the European Union (EU) and economic stall in S.E. Asia.
For instance, Spain has joined seven other EU countries in recession. Spain’s unemployment rate is now 24.4 per cent, the highest level in 18years.
Charles Elliot, Harvard professor says- “Weak banks especially in Spain bought more of the debt of weak sovereigns while foreigners have sold down their holdings”.
The result is that global banks are cutting back on international lending.
Before now, the naira and the reserves have enjoyed a good run on the back of influx of forex in form of lending or investment, high oil prices and production. In January, Bonny Light price hit a record $127per barrel, the highest level since 2008, bringing the forex inflow to $4.31 billion, leaving excess of inflow over outflows at $1.36 billion.
When balance sheets of other countries, particularly developed economies begin to think patriotism and not where will better the bottom line, the influx of forex witnessed in the past few months that helped stabilised the naira and grew the forex reserves will be in short supply, thus put pressure on the naira and reserves.