Experts warn US dollar strength and election risks may raise Nigeria's borrowing costs

Financial experts have warned that a strengthening US dollar and uncertainty surrounding Nigeria’s upcoming election season could place significant pressure on the local currency. These factors are expected to increase the country’s borrowing costs, particularly regarding its dollar-denominated debt obligations. During a recent dialogue concerning the consequences of the Democrats' electoral success in the US, experts emphasized the strong link between global financial systems and internal political stability.

The concerns were raised during the latest episode of the 'Drinks and Mics' podcast, hosted by Ugo Obi-Chukwu, the founder and chief executive officer of Nairametrics. Participants in the discussion analysed how shifts in US monetary policy and domestic political dynamics could impact Nigeria’s economic outlook. The primary focus was on the potential for a stronger dollar to exacerbate the cost of servicing external debt, a critical issue for emerging markets with significant foreign currency liabilities.

Background

Arnold Dublin-Green, who serves as the Chief Investment Officer at BGL Asset Management, observed that the upward trend in American government bond yields alongside prospective shifts in monetary policy pose significant difficulties for Nigeria's ability to secure external debt. He highlighted that recent market volatility and movements in US Treasury yields could have direct implications for Nigeria’s borrowing costs, especially if the Federal Reserve decides to raise interest rates in December. Dublin-Green explained that higher US interest rates often lead investors to reassess the returns available from riskier assets in emerging markets compared to safer, dollar-denominated investments. This shift can result in capital outflows from countries like Nigeria, further pressuring the local currency.

The pressure on the naira has already been evident in recent market data. Reports indicate that the naira depreciated by 0.The currency lost 22% of its value in the initial days of November, settling at N1,349 for every US dollar by November 6. This decline in the naira's value took place at a time when trading activity on the Nigerian Foreign Exchange Market was relatively low. The combination of a stronger dollar and election-related uncertainty adds to the burden on the local currency, as the naira cost of servicing foreign currency obligations increases when the dollar strengthens.

Why it matters

The potential rise in borrowing costs is a significant concern for Nigeria’s fiscal management. As the cost of servicing dollar-denominated debt increases, more of the country’s revenue may be diverted to debt repayment rather than development projects or public services. This dynamic is particularly acute in the context of an upcoming election, where political uncertainty can deter investment and weaken currency confidence. However, not all experts view the global economic shifts as entirely negative for Nigeria.

Muktar Muhammed, CEO of Finance with Muktar, offered a contrasting perspective, suggesting that US tariffs could have a positive effect on the Nigerian economy. He argued that the net impact would depend on the extent to which Nigerian products are directly affected by these trade measures. Conversely, finance expert Oluwapelumi Joseph directed attention to the petroleum industry, pointing out that the government's fiscal assumption of $64 per barrel allows for increased income should international crude prices stay high. Joseph pointed out that Nigeria’s crude oil production is currently around 1.8 million barrels per day. He proposed that maintaining production levels between 1.8 million and 2 million barrels daily would bolster the nation's petroleum earnings, which could help counterbalance certain stresses arising from the currency market. Furthermore, Joseph maintained that crude oil costs were improbable to drop to $50 per barrel and that borrowing costs had not fallen enough to cause a large-scale withdrawal by international investors.

What happens next

The immediate focus for market participants is on the Federal Reserve’s decision regarding interest rates in December. A rate hike could intensify the pressure on emerging market currencies, including the naira, and further raise borrowing costs for Nigeria. Domestic stakeholders will also be watching the political landscape closely as the election season progresses, as any instability could exacerbate currency volatility. While some experts see opportunities in oil prices and trade policies, the prevailing caution among financial analysts suggests that the convergence of a strong dollar and political uncertainty poses a significant risk to Nigeria’s financial stability in the near term.