By Lukman Otunuga
Global economic conditions remain strained by the
coronavirus menace while soaring inflation across the world has prompted major
central banks to tighten monetary policy.
In 2021, Nigeria reported almost 250,000 reported cases,
even as 16 million vaccinations were administered. Given how disruptions
created by the pandemic clouded the economy’s growth outlook, heavyweights like
World Bank and IMF projected GDP to expand between 1.8% to 2.6% in 2021.
On the bright side, Nigeria enjoyed easing inflationary
pressures last year unlike other major economies like the United States, United
Kingdom, and South Africa among many others.
This placed the Central Bank of Nigeria in a comfortable
position to leave monetary policy unchanged, at a critical time where the
economy embarked on a fragile road to economic recovery. The sharp appreciation
in oil prices also provided Nigeria a tailwind, bolstering export earnings and
government revenues – further lifting sentiment towards the economy.
As 2022 gets into full swing, there are a couple of external
and domestic themes that will influence economic growth. Inflation remains one
of the primary themes that will influence global sentiment this year.
Untamed inflation has prompted central banks to join the
global tightening bandwagon. The Federal Reserve has indicated they could raise
interest rates three times in 2022, the Bank of England surprised markets with
a rate hike last year, the South African Reserve Bank also raised interest
rates.
However, with coronavirus cases soaring across the globe,
some central banks are likely to think twice before raising rates. Central
banks like the European Central Bank, People’s Bank of China, and Bank of Japan
among many others fall into this category.
We may see a world divided by various spheres of monetary
influence as one camp embraces hawks and the other doves. This places Nigeria
in a tricky position. Given how the Nigeria general election will be held in
February 2023, the decline in inflationary pressures may be halted by political
spending this year.
If inflationary pressures make a return in 2022, the Central
Bank of Nigeria may be forced to tighten monetary policy. However, cooling
inflation will buy the central bank more time to leave monetary policy
unchanged in an effort to support the economic recovery.
Last Friday, it was revealed that the US economy created
199,000 jobs which were far below the 400,000 market expectations. Although the
NFP numbers were disappointing, the US unemployment rate fell to 3.9% from 4.2%
in November while hourly earnings jumped 4.7% versus the expected 4.2%.
These bright spots may strengthen bets over the Federal
Reserve raising interest rates sooner than expected. In fact, traders are
currently pricing in an 82% probability of at least one Fed rate hike by
mid-March 2022. Should the CBN take action, this may be in March or May.
After ending 2021 roughly 35% higher, Brent has entered the
new year on a steady note. The commodity remains supported by OPEC’s optimistic
outlook for oil demand and the global economic recovery.
Prices have also found short-term support from geopolitical
developments and production shortages. Nigeria could have one less problem to
think about if oil prices remain at elevated levels throughout 2022. However,
the persistent uncertainty around Covid-19 and the threat of fresh variants
trigger fresh restrictions could cap oil’s upside gains.
Essentially, Nigeria’s outlook remains influenced by the
same old themes. If oil prices remain stable, foreign exchange currency
reserves and governments revenues will likely rise. High oil prices may support
the CBN’s effort to defend the local currency against external and domestic
risks.
Alternatively, if oil prices weaken, this could hit
reserves, weaken the Naira and ultimately weigh on economic growth. When
considering how the Fed remains on a path to monetary policy normalization, the
narrowing interest rate differential between both currencies may hit the Naira
further.
The world pinned hopes on stability and normality returning
in 2021. Instead, it was another uncertain year defined by soaring inflation
and Covid-19 variants. With rising inflation a cause for concerns and central
banks tightening policy, this could be another wild year for global markets –
especially if Covid-19 cases continue to rise.
One economy to keep an eye on is China. The economy is
expected to expand 8% in 2021 according to the world bank. Robust growth in
China may translate to a jump in demand for oil markets which will be a welcome
development for Nigeria.
For more information, please visit: FXTM
Disclaimer: This written/visual material is comprised of
personal opinions and ideas. The content should not be construed as containing
any type of investment advice and/or a solicitation for any transactions. It
does not imply an obligation to purchase investment services, nor does it
guarantee or predict future performance.
FXTM, its affiliates, agents, directors, officers or
employees do not guarantee the accuracy, validity, timeliness or completeness
of any information or data made available and assume no liability for any loss
arising from any investment based on the same.
Risk Warning: CFDs are complex instruments and come with a
high risk of losing money rapidly due to leverage. 81% of retail investor
accounts lose money when trading CFDs with this provider. You should consider
whether you understand how CFDs work and whether you can afford to take the
high risk of losing your money.
Written by Lukman Otunuga, Senior Research Analyst at FXTM
0 comments:
Post a Comment