The United States economy posted a stronger-than-expected jobs report for December, creating 256,000 jobs compared to economists’ forecast of 160,000. This robust performance signals a resilient labor market and is reshaping expectations around the Federal Reserve’s interest rate policy. For Nigeria, the implications could be significant, especially for the naira, which faces renewed depreciation risks.
US Job Report and Rate Expectations
The report, released by the Bureau of Labor Statistics, revealed a jobs market that exceeded the revised November figure of 212,000. Following the announcement:
• US Treasury yields surged, with the benchmark 10-year yield climbing to 4.76% and the two-year yield reaching 4.38%.
• Futures traders adjusted their expectations, delaying the anticipated first Federal Reserve rate cut in 2025 from June to September.
• The odds of multiple rate cuts have declined, and some analysts, including Bank of America, suggest the Federal Reserve could pivot toward further rate hikes if inflation accelerates.
Implications for Nigeria
The latest US jobs report raises concerns about the naira’s trajectory in 2025. Analysts had previously projected that a series of Federal Reserve rate cuts would boost capital inflows into emerging markets like Nigeria, offering support to the naira amid weak foreign exchange inflows and a widening trade deficit.
However, the likelihood of sustained high US interest rates now casts doubt on these projections:
• Elevated US yields attract investors to safer, higher-yielding US assets, reducing interest in riskier emerging market investments.
• Data from Nairametrics shows capital importation into Nigeria is expected to decline significantly in the second half of 2024 compared to the first half, which recorded $6.4 billion in inflows due to a strong first quarter.
• Analysts have attributed this anticipated drop to weakening investor confidence and uncertainty surrounding the November US elections.
• Projections for higher capital inflows in 2025, which relied on expectations of US rate cuts, now risk falling short.
At the First Bank Economic Outlook held in Lagos earlier this week, Bayo Adedipe Associates forecasted an exchange rate of N1,574/$1 in 2025, based on assumptions of declining US interest rates. However, with US yields likely to remain elevated, the naira could face further depreciation pressures, casting uncertainty over these forecasts.
Economic Risks and Policy Challenges
The prospect of sustained high US interest rates presents several challenges for Nigeria’s economy:
• Dollar-denominated debt servicing costs could rise, exacerbating the country’s fiscal challenges.
• A depreciating naira would further strain government finances and reduce fiscal policy options.
• Sustained high US rates could worsen dollar shortages, increasing naira volatility and driving up import costs.
• Inflationary pressures could rise, further burdening consumers and businesses already struggling with rising costs.
These developments also complicate the Central Bank of Nigeria’s (CBN) monetary policy. The CBN, already balancing efforts to control inflation with fostering economic growth, may find it increasingly challenging to stabilize the naira without substantial foreign exchange inflows.
Exchange Rate Developments
Despite the naira depreciating by approximately 40% in 2024, closing the year at N1,553/$1, some stability was observed toward the end of the year. The naira closed stronger at N1,544/$1 last week, a stability attributed to the CBN’s introduction of a forex matching system, which analysts say has increased transparency and improved liquidity in the foreign exchange market.
As the US economy continues to show resilience and interest rate expectations shift, the naira’s outlook remains precarious. Policymakers in Nigeria face mounting pressure to address these external and domestic economic challenges to maintain stability and foster growth.
