•Says urgent action needed fortify fiscal, monetary framework •CBN’s boosts naira by 1.1% in weekly interventions
By Chinwendu Obienyi
Nigeria, alongside other emerging markets, faces a looming threat of substantial capital outflows driven by a complex web of global and domestic challenges.
At the heart of the risks are policies such as President Donald Trump’s “America First” agenda, which JP Morgan highlighted over the weekend as a potential disruptor to the financial stability and economic growth of vulnerable economies.
Although Nigeria was not specifically mentioned in the report from the investment bank, the reference to emerging markets undoubtedly includes economies like Nigeria, which is Africa’s 4th largest economy.
According to JP Morgan, as of January 2025, emerging markets are experiencing a “sudden stop” of capital flows, with $19 billion in net capital outflows recorded in the last quarter (Q4) of 2024 and an additional $10 billion expected in the first quarter (Q1) of 2025.
The “America First” policies, designed to prioritise U.S. economic interests, have created ripple effects across the global financial landscape.
The shift, combined with rising interest rates in advanced economies, has made foreign investors increasingly hesitant to retain their investments in riskier markets, sparking fears of capital flight.
For Nigeria, the implications of such capital outflows could be far-reaching.
As the largest economy in Africa, Nigeria relies heavily on foreign capital to fund critical sectors, stabilize its currency, and drive infrastructural development.
A sudden or sustained withdrawal of foreign investments would exacerbate existing economic vulnerabilities, including currency depreciation, inflationary pressures, and reduced fiscal space for government spending.
Moreover, Nigeria’s dependence on oil revenues exposes it to further risks. Any global financial shocks caused by capital outflows could lead to lower demand and falling oil prices, compounding the country’s fiscal and external imbalances. In addition, structural weaknesses such as limited diversification, insecurity, and infrastructural deficits leave Nigeria less resilient to external shocks compared to more diversified economies.
JP Morgan’s warning, experts note, serves as a call to action for Nigeria and other emerging markets to fortify their fiscal and monetary frameworks.
Strengthening these systems could help mitigate the risks of capital flight by building investor confidence and ensuring macroeconomic stability. Nigeria must also focus on implementing policies that attract and retain long-term investments, including improving governance, tackling corruption, and addressing structural bottlenecks in key sectors like energy, manufacturing, and agriculture.
Without proactive measures, the cascading effects of global policy shifts, such as the “America First” agenda, could deepen economic challenges, widening inequality and limiting opportunities for sustainable growth in countries like Nigeria.
JP Morgan said: “Put simply, using the widely accepted academic definition, this would signal that EM ex-China is on the verge of a sudden stop” and noted that such occurrence should not be underestimated.
Analysts fear that without access to capital, these economies may face challenges ranging from slower economic growth to deeper financial crises.
JP Morgan noted that the current slowdown in capital flows is not being driven by an emerging markets-specific crisis. Instead, it is primarily linked to the global tightening of financial conditions, spurred by Trump’s economic policies.
“This is not a situation where specific EM countries are under pressure and are facing balance of payments or currency crises as was the case in 1998-2002, 2013, or 2015. Rather, it is one of the strong U.S. economy and policy risks pulling flows out of EM”, JP Morgan clarified.
Despite the risks, JP Morgan suggested that most emerging markets, including Nigeria, should be able to withstand the shock of a sudden stop in capital flows. However, countries such as Romania, Malaysia, South Africa, and Hungary were identified as being more vulnerable to these outflows.
It noted that to navigate these challenges, policymakers in Nigeria should prepare for potential spillovers from the U.S. economy and focus on strengthening its financial system.
Meanwhile, the naira appreciated by 1.1% to N1,531.20/$1 at the Nigerian Foreign Exchange Market (NFEM), following the CBN’s intervention, selling $113.85 million to authorized dealers.
On the flipside, it closed flat at N1,660/$1 in the parallel market. However, following these interventions, the FX reserves level declined by $303.95 million w/w to $39.99 billion (23 January).
In the forwards market, the naira rates decreased across the 1-month (-0.1% to N1,591.41/$1), 3-month (-0.8% to N1,667.93/$1), 6-month (-1.6% to N1,779.33/$1) and 1-year (-1.4% to N1,962.32/$1) contracts.
Cordros Research in an emailed note to Daily Sun, said, “In the short term, while we expect FX demand pressure to remain intact, we believe sustained CBN intervention and increased transparency and market efficiency from the adoption of the Electronic Foreign Exchange Matching System (EFEMS) will support naira stability”.