About $10 billion of Nigeriaâ€™s $37.8667 billion external reserves is made up â€˜hot money,â€™ a report has stated.
Hot money refers to the flow of speculative funds from one country to another in order to earn short-term gains or profits.
However, on the first sign of trouble or instability â€“ political or economic â€“ the capital is quick to exit the country, which could cause serious dislocations in the financial system and the larger economy.
The Asian financial crisis in 1997 was partly blamed on the exodus of hot money from the financial system on the continent.
Financial market analysts have continued to express concern over the high level of portfolio investments in the Nigerian financial market, arguing that the exit of such short-term funds from the system may reverse the achievements of the monetary authorities.
As a result of the attractive yields on Nigeriaâ€™s fixed income securities, the equities market, as well as listing of the country on the JP Morgan Emerging market index, the country had recorded massive inflows of portfolio investment from overseas.
But the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane stated the reversal of capital flows in Nigeria as a result of the tapering of quantitative easing programme in the United State may continue due to headwinds from the global market.
He also argued that there could be further depletion of the countryâ€™s external reserves.
Rewane stated this in his latest monthly economic news and views presented at the Lagos Business School.
He pointed out that weak growth in Europe would affect credit lines of banks, adding that average commodity prices have also declined by 0.11 per cent year-to-date.
Cost of Nigerian imports unlikely to increase significantly, the report stated.
He noted that invisible trade constitutes 50.3 per cent of total forex payments, noting that there were further external sector imbalances in a run-up to elections in the country.
The FDC boss predicted that the imbalance in the equities market would likely increase, while the stock market correction continues.
He anticipated about three per cent dip in the All-share Index.
â€œContraction in money supply growth to continue with the Central Bank of Nigeriaâ€™s (CBNâ€™s) tight monetary policy stance. It contracted by 0.97 per cent in February to N15.32 trillion,â€ he stated.
According to Rewane, the pressure on the naira is expected to increase. He described the CBNâ€™s tightening measures as a temporary solution, saying that the recent increase of the Cash Reserve Requirement for private sector funds to 15 per cent would have marginal impact on currency value.
According to him, approximately N423 billion would be quarantined from commercial banks as a result of the CRR hike. The amount is equivalent to 66.67 per cent of monthly FAAC disbursement.
â€œThe spread between market exchange rates to remain the same. The naira lost 3.68 per cent year-to-date at the interbank market.
â€œNigeriaâ€™s credit rating outlook downgraded to negative from â€œcredit watch negativeâ€ as a result of heightening political and institutional risk. The downgrade is likely to impact Foreign Direct Investment inflows.