Medium-term financial stability risks remain elevated – Report

The International Monetary Fund (IMF) recently released its Global Fiscal Stability report, which sheds light on the elevated financial stability risks in both developed and emerging markets. This report highlights the tightening in global financial conditions, which has raised concerns about the near-term risks to global growth and financial stability. Egie Akpata, Director at Union Capital Markets, joined CNBC Africa to delve into the implications of this report, particularly for markets like Nigeria. As the global economy navigates through uncertain waters, the discussion revolved around the potential impact on Nigeria's financial markets. One of the key themes that emerged from the interview was the issue of elevated asset values in both developed and emerging markets. Akpata noted that while asset values in Nigeria may not be considered inflated, the reliance on foreign portfolio investments for reserve management, especially in the fixed income side, could potentially result in flows to frontier markets like Nigeria. However, despite the potential for increased investments, the actual inflow of funds into the Nigerian equity market has not been significant, indicating a cautious approach from foreign investors. Another major point of discussion was the monetary policy stance of Nigeria and its implications on foreign portfolio flows. Akpata highlighted that the Foreign Portfolio Investment (FPI) flows are more influenced by market yields rather than the Monetary Policy Rate (MPR). The recent signaling of intentions by the Monetary Policy Committee (MPC) of Nigeria to normalize its monetary policy may not have a significant impact on FPI flows, as market yields play a more crucial role in attracting foreign investments. The conversation also delved into the fiscal situation in Nigeria, with a focus on government borrowing and revenue generation. Akpata expressed concerns about the federal government's heavy reliance on borrowing to fund the budget and the challenges associated with growing revenues amid talk of potential tax increases. While the state governments have limited fiscal powers, the federal government faces a more complex situation with borrowing being the primary source of budget funding. Looking ahead, the discussion touched upon the forecast for the debt markets in Nigeria, with a particular focus on sovereign and sub-national issuances. Akpata highlighted that while sub-national entities may not be heavily constrained, the federal government is likely to continue its borrowing spree due to the absence of viable alternatives for revenue generation. The impact of government behavior in the debt markets, coupled with the importance of fixed-income yields in attracting foreign investments, were also key points of consideration. In conclusion, while the IMF report signals medium-term financial stability risks in the global economy, the implications for Nigeria's markets remain nuanced. With a cautious approach from foreign investors, a careful balance between fiscal management, monetary policy decisions, and revenue generation will be crucial for navigating through the uncertain financial landscape.