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Following its openly criticised cryptocurrency ban in Africa’s’ largest economy by size of gross domestic product (GDP), the Central Bank of Nigeria (CBN) turns out to be correct about the uncharted territory that shakes the banking sector in the United States.
The crypto bank generated heat among digital assets investors seeking a decentralised financial system devoid of government regulation. History has not proven that there has been a such thing without being regulated that has ever succeeded in the capitalist space.
Due to sensitivity, the EU recently adopted legislation to oversee cryptocurrency trading activities. In a chat with experts, the emphasis has been that without regulation, cryptocurrency trading will not work, and cannot be trusted as the world fights against money laundering and terrorism financing.
Damilare Asimiyu, Macroeconomic Strategist & Head, and Investment Research at Afrinvest West Africa told MarketForces Africa told MarketForces Africa that deposit money banks were shielded from the recent Banking crisis in the United States due to the regulator’s decision to outlaw crypto trading in Nigeria
A number of banks have gone under as a result of a lack of policy coordination following the United States Federal Reserve’s sustained hawkish pose that eventually hit US banks involved in cryptocurrency transactions.
Moving through an uncharted territory comes with uncertainties, and unknown to Nigerians, the Central Bank of Nigeria’s decision not to allow local banks to get involved in crypto transactions shields the industry from the US Banking crisis.
The impact has been minimal for Nigerian corporates except for a few like Chipper Cash, a fintech platform that offers mobile, cross-border money transfer services.
“There are lots of regulatory measures that I think have largely insulated Nigerian banks from the kind of development witnessed in the US recently”, Asimiyu said.
Nigeria banks are not exposed to extremely risky lending such as investment in crypto, which is considered as one of the causes of the collapse of the affected banks, and consumer lending is also very low, he added.
“The only immediate impact the US banking crises can have on Nigerian banks is contagion effect, in the form of capital repatriation and poor pricing of their Eurobonds if the tension heightens”.
Speaking about naira devaluation, he said no one has a crystal ball on the outlook of the exchange rate for 2023 because the CBN’s policy communication has been very poor lately.
However, looking at the major sources of Nigeria’s FX earnings, one can see pressure building up on two – foreign investment flows and remittance, while the third one – crude oil production volume is gradually recovering.
Asimiyu said on the balance of expectation, the parallel market rate for 2023 is likely to remain within the band of 750 to 790/$1 as there is a very slim chance that all three sources can attract significant inflows this year due to political uncertainty, declining global growth, and aggressive policy tightening in AEs.
Speaking about reduced gap between inflation and benchmark policy rate, Asimiyu highlighted that it would only signify if bond and T-bills yields also increase correspondingly.
“This is what incentivizes market players and not just mere MPR closing up on inflation rate”.
He said that should yield in the fixed income respond correspondingly, you should expect a flight to safety from equities as the market would reassess valuations.
On Interest, Inflation, and Exchange rates
According to Afrinvest head of macros, theoretically, higher rates serve banks better because it directly impacts their top line through their primary business line – interest income.
However, he said in reality, having the three in moderate proportion is what is best. That is why every central bank’s primary objective is price and exchange rate stability.
Put succinctly, Asimiyu said high-interest rates and higher exchange rates are most times fruits of high inflation. So, when inflation is high, the compensating factor is to raise the interest rate and rein in inflation.
“Where interest hike is unable to abate inflation rate due to structural factors, speculation of foreign exchange by holders of the domestic currency to preserve the value of their wealth would also drive exchange rate higher
“Concerning the impact of aggressive tightening on growth, of course, growth momentum would decelerate because what drives economic growth mostly is increase aggregate demand, which in turn drives increase productivity”.
Nevertheless, economists would always sacrifice growth to a large extent to deal with inflation because when growth slows, only a few are badly affected but when inflation hit the roof, the whole economy pays for it, Asimiyu said.
The current banking crisis in the US is ordinarily informed by an incident that happens in the normal cycle of business which is the failure of Silicon Valley Bank, Sheriff Yusuf, Chairman, of Modesty Capital Ltd said.
However, because of the systemic significance of banking, especially one with such a huge size, it is understandable that the US Fed had rallied support to ameliorate the impact of the bank’s failure, he added.
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