EU Quantitative Easing: Nigeria could benefit

The Board of the European Central Bank (ECB) has proposed easy money plans akin to the U.S. Quantitative Easing which helped prop up emerging and frontier economies in the wake of the global financial crises triggered by sub prime lending. The move could signal a return of portfolio investors to developing economies including Nigeria.

Mario Draghi, President, ECB

A Wall Street Journal report Thursday, says the European Central Bank’s executive board proposed buying roughly €50 billion ($58 billion) a month in bonds for at least a year  citing people familiar with the matter.

Although the primary motive for broaching the policy, which the ECB had consistently shied away from over the years despite an adoption by Japan, US and the UK, is to prop up the Euro area economy and check deflation, it could have a trickle-down effect on emerging and frontier economies.

The proposal, described as open ended for its more than one year operational period, could see foreign investors return to Nigeria after leaving in droves last week, taking nearly N800 billion with them.

A combination of policy and market conditions had contributed to the herd exit from Nigerian assets.

The Central Bank of Nigeria (CBN) had devalued the Naira, Nigeria’s national currency by 8 percent, moving the target band to 160-176 Naira to the U.S. dollar.

The domino effect was further felt from the tumbling of oil prices in the international markets from a high of over $100 to less than $50.

The mass murder activities of terror group Boko Haram in the North East of the country and fears that the politics of hate playing out in the runoff to Presidential polls in February could spark off nationwide violence irrespective of who wins, helped the acceleration of the scampering investors.

A return of global investors, albeit at a lesser rate should temper the JP Morgan threat to yank the country off its Government Bond Index (GBI-EM), the MSCI index of emerging market bonds, of which the country makes up 1.8 percent.

Although some analysts have expressed doubts that JP Morgan would carry out the threat, others say with the continued free fall of oil price which has deleterious effects on the Naira and Naira denominated assets, the spectre would be the grim reality.

Despite the enthusiasm of the ECB on the QE program, some analysts say the amount involved, at 600 billion Euros, is too small to have a significant impact on the EU or global economies.

Athanasios Orphanides, a professor at the Massachusetts Institute of Technology and former head of the central bank of euro-member Cyprus, who has been calling for a €2 trillion program, described the figure as “woefully inadequate”, according to the WSJ.

The reversal of inflows that could result from the stimulus plan should be a call to action for Investor Relations executives.

It is an indication that the capital market could be buoyed, leading to increased activity at the Bourse. It would be signal that the science and art of engagement, for which IR is known is about to take several leaps forward.

 References

http://www.wsj.com/articles/ecb-executive-boards-qe-proposal-calls-for-roughly-50-billion-in-bond-buys-per-month-1421851130

http://www.reuters.com/article/2015/01/16/nigeria-bonds-idUSL6N0UV2DH20150116