Brexit may slow down capital flows into Nigeria

Capital inflows into frontier markets, including Nigeria, may slow as investor confidence has been severely undermined by the uncertainty created by Britain’s vote to leave the European Union.

The Sub-Saharan Africa Economist, Renaissance Capital, Yvonne Mhango, stated this in an emailed note on the potential effect of Brexit on the region.

According to her, the region tends to be affected by global events via the financial and trade channels.

The Central Bank of Nigeria had recently liberalised the foreign exchange market, with many analysts saying the move would help in luring back investors who were spooked by monetary controls introduced initially by the bank including a 16-month currency peg of N197-N199 to a dollar.

But the Brexit vote may have dampen the appetite of investors looking to bring back capital into Nigeria.

“In brief, of the bigger SSA economies, Kenya is one of the countries most exposed to a Brexit (relatively), via the tourism, trade and financial channels. We think Nigeria will be most affected via the financial channel,” Mhango said.

Explaining the possible impact of Britain’s exit from the EU, she said, “We think this may result in a slowdown in capital flowing into frontier markets, as investors hide in safe-haven assets. Increased risk inversion may temper the appetite for SSA Eurobond issuances planned for the second half of the year.

“Nigeria, in particular, was unfortunately hit on Thursday by a double whammy – a credit rating downgrade by Fitch (to B+, from BB-), which will make it more expensive for Nigeria to borrow externally in the third quarter of the year when it issues its planned Eurobond, and Brexit, which may temper appetite for Nigerian assets.”

She said a further slowdown of capital inflows into SSA would result in a further deterioration of external balances that were already reeling from depressed commodity prices.

She said currencies would come under pressure, adding that the most tradable currencies would depreciate the most (like the ZAR has done) on the back of news that Britain voted to exit the EU.

The RenCap economist said, “The SSA currencies, less so, because their currencies are more managed. Kenya’s central bank has pledged ‘to intervene in the money and FX market to ensure their smooth operation’.

“For Nigeria, we think this means investors that were encouraged by the liberalisation of the country’s FX regime and were considering dipping their toes into the country, may now pause given the rise in global risk aversion, following the Brexit vote. This further delays a recovery in Nigeria’s capital inflows, which is negative for the naira.”

Mhango said the United States’ Fed rate hikes might be pushed out and this would offer a reprieve for SSA currencies.She said, “Britain may have to broker new trade agreements, which may have some implications for the SSA.”