Boom or bust for Nigeria as trade war spooks financial markets

Omodele Adigun

As trade spat between the US and China finally broke out last weekend, the financial markets around the world reacted negatively while Nigerian bond market was equally hit by massive sell-offs by foreign investors.

The world’s top two economies exchanged fire by hitting $34 billion of each other’s exports with high new tariffs, the first moves in what may become a devastating cycle of retaliation.

The US tariffs on China target more than 800 different items, including industrial machinery, medical devices and auto parts. Beijing plans to fire back by hitting 545 American products such as SUVs, meat and seafood.

President Donald Trump and his advisers argue the tariffs are necessary to pressure China into abandoning unfair practices such as stealing intellectual property and forcing American companies to hand over valuable technology.

China, on the other hand, denied that it has done anything wrong , warning that it’s ready to fight a trade war until the end.

“The United States will be opening fire on the whole world and also opening fire on itself,” Chinese Commerce Ministry spokesman, Gao Feng , warned on Thursday, adding that the US tariffs will hurt foreign companies that export goods from China to the United States.

Since the conflagration of this tit-for-tat war is going to consume the whole world, Nigerian banks may have to brace up for troubles ahead as the entire activities that help them chalk up earnings may soon go up in smoke.

Already, the spat between the erstwhile partners had already rattled the global markets and provoked warnings from companies of damage to their bottom lines and higher prices for consumers.

An analyst, Mr Keneth Ukanwa, manager, Technology Advisory with KPMG Advisory Services,.had recently told the banks to be at alert.

According to him, the banks in Nigeria thrive on economic activities, since the business of the banks basically is deposit mobilization, “getting money from the people who have excess and giving it to the people who don’t get enough. When I said economic activities, it covers investment generally, whether it is Foreign Direct Investments (FDIs) or Foreign Portfolio Investments (FPIs). You know that one of the inevitable ways an economy can boom is the more you invest, either in infrastructure, healthcare or education. And if we don’t have a lot of money moving in the economy, it is also going to affect the boom that we are beginning to experience again in the banking sector. As you may be aware, the banks’ audited financials for 2017 (show improved performance). A bank like Zenith Bank, for instance, made a profit after tax of N178 billion. That is only possible because a lot of economic activities are going on in Nigeria.

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“So typically, the US-China trade crisis can have long-reaching impacts on banks in Nigeria,” he said.

Explaining more on how this might impact the banks, Ukanwa stated:

“As you know, both China and US are among the super powers. What that means is that they control a significant portion of the world economic activities. Of course, if they decide not to do with each other for the purpose of buying and selling or for whatever purpose, that means they are going to put sanctions on each other. And what you will find out is that there would be factions. The world economies would become divided: some tilting in favour of China, obviously for their own selfish purpose, while some towards the US. What that means is that it is a crisis that would impact not on US and China alone, but also on other countries in the world economic village, and Nigeria is not left out.

“And what it means is that Nigeria may not be able to buy certain products from China or from the US. As you know today that Nigeria is import dependent. And what it means again is that we buy a whole lot from China. Nigeria has made a lot of money from importing from china, and we also patronise the US a whole lot. So what it means is that , depending on where we tilt, depending on how the crisis pans out, we may have similar restrictions if such restrictions are placed on economic activities either by US or China. This is going to affect economic activities in Nigeria.”

Most Nigerian banks have correspondent relationships with U.S. banks. Investopdia, an online dictionary, defines correspondent bank as a financial institution that provides services on behalf of another, equal or unequal, financial institution. It can facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of another financial institution.

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If Nigeria aligns with China in the ensuing trade war, it is likely the US government will impose sanctions on companies, banks inclusive, doing business with Nigeria. This may ultimately affect the business relationship between the Nigerian banks and their correspondent banks in the US.This may invariably lead to contraction in the earnings grossed by the local banks.

Recall that the US had recently warned Nigeria and other African countries to be wary of Chinese loans.

According to its immediate past Secretary of State, Rex Tillerson, China “encouraged dependency, utilised corrupt deals and endangered Africa’s natural resources.”

He added: “We are not in any way attempting to keep Chinese ‘dollars’ from Africa,” he said, “(but) it is important that African countries carefully consider the terms of those agreements and not forfeit their sovereignty.”

Tillerson said Chinese investments “do not bring significant job creation locally” and criticised how the country structures loans to African governments, saying if a government accepts a Chinese loan and “gets into trouble,” it can “lose control of its own infrastructure or its own resources through default.”

The Chinese government has pumped billions into infrastructure projects across the continent, although critics say there is often little gains for local economies because Chinese firms and nationals build the roads and rails.

Commenting on the likely fallout should Nigeria aligns with the US, Ukanwa said:

“If the Chinese is no longer committed to investing in Nigeria; if we see those Chinese technocrats going back to their country, obviously it is going to affect investment.”

China’s investments in the country as at the end of 2016 was said to have exceeded $13 billion. Last year alone, it invested $1.79 billion. This showed that the Asian country is one of Nigeria’s top sources of Foreign Direct Investment (FDI).

Nigeria and China are currently in currency swap deal to the tune of 15 billion Renminbi or N720 billion with a three-year tenor.

The United Nations Conference on Trade and Development (UNCTAD), in its Global Investment Trends Monitor of 2013, said Nigeria’s FDI declined by about 20 per cent to $5.5 billion, largely due to asset sales by foreign oil companies such as Royal Dutch Shell and Chevron.

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