How a global financial market crisis could spread to Nigeria

Current selloffs or cryptocurrencies, US equities and other global financial markets could have a ripple effect on Nigeria, Nairametrics analysts believe.

Currently, market sell-offs have largely affected the equity market in most developed markets, while cryptocurrencies have lost around half of their all-time high market values ​​set around November last year.

Contrary to what is happening on a global scale, the Nigerian economy is not impacted for the moment. In fact, the local stock market‘s all-stock index hit a 13-year high last week as gains of trillion naira dragged the market to a new crescendo. However, Nigeria may not be completely immune to the global sell-off and it is only a matter of time before we start to feel the impact locally. Here are examples of how it could affect us locally.

Increase in cost of borrowing

Low interest rates on foreign assets have for years made Nigerian foreign debt such as Eurobonds some of the most sought after in the world. With yields as high as 7%, foreign investors are snapping up risk-free debt that yields a significantly higher return than they will get from bonds sold by Western countries.

  • Local banks and businesses in Nigeria have also taken advantage of these Nigerian debt attractions to borrow in international markets, some at returns far below what they would have had the US Fed not deliberately kept rates low. .
  • Now those yields are likely to go up, making future borrowing more expensive for Nigerian businesses. This will affect those looking to refinance, new borrowers and even those servicing existing debts.
  • It could be worse for companies that have foreign currency-denominated loans on their balance sheets, especially if interest rates are floating.

Foreign imports/exports

Businesses that rely heavily on foreign imports have another problem to contend with aside from rising inflation.

  • A market crisis amid rising oil prices and growing global demand for goods and services could make imports even more expensive to finance.
  • Correspondent banks around the world will tighten their trade policies, which will make it more difficult to find financing for the import of goods and services.
  • The world is still grappling with logistical blockages that have slowed the movement of goods and services across the globe.
  • There are also fears that the accumulation of inventories could torpedo forecasts of a rise in the price of crude oil in the short term. Oil prices fell slightly last week as investors sold their positions in financial assets. Already, traders are hinting that the price of oil has risen too quickly after a slew of reports from investment banks predicted an oil price of $100.
  • A sell-off in financial markets, if it persists, will stifle global demand for oil and depress prices, a situation that could affect Nigeria’s oil revenues and exchange rate stability.

Crypto industry

Cryptocurrencies have already lost 50% of their market value since peaking in November 2021. Recent selloffs alone have seen Bitcoin drop over $13,000 off its price at the start of the year .

  • Being a coveted asset worldwide, especially by Nigerians, suffice it to say that millions of dollars in investments may have been lost in these ensuing sales.
  • Those who may have been lucky enough to withdraw their funds will have to wait for some time before returning to the market, thus losing an important source of income for many unemployed Nigerians.
  • This could have a ripple effect on the incomes of tens of thousands of Nigerians who have made money from the cryptocurrency market.
  • There are also many others who, beyond crypto mining and trading, are also creating their own project-backed utility coins. These people could find it difficult to finance some of their projects if the market sell-offs intensify as expected.

Remote work

Although currently unrelated, we see a contagion in remote work jobs available online. Today, most jobs are tied to projects funded by cheap dollars provided by fund managers, some of whom are facing massive withdrawals of funds.

  • We expect some projects to be stalled this year, especially debt-funded ones that will negatively impact overseas remote jobs. On the other hand, massive investment in the metaverse world could help stem the slide triggered by the financial crash.
  • Megacorporations, like Meta and Microsoft, will continue to spend heavily to invest in technology and labor, helping to create more jobs around the world. Nonetheless, the impact of the sales will negatively impact remote work jobs in Nigeria, forcing an increase in the unemployment rate, albeit in the short term.

Startup Community

The Nigerian startup scene has raised hundreds of millions of dollars in recent years through increased attraction to the Nigerian FinTech scene. However, things could get very tough this year if our projection materializes.

  • We suspect that market sales could affect pending funding rounds and capital raising efforts of local Nigerian initiatives.
  • Founders who have not yet completed their capital-raising plans may need to step up their cash-raising efforts or find themselves caught in the ensuing meltdown.
  • New funding rounds could also decrease this year compared to the wave of deals reported in 2021.
  • Investors are also likely to review the type of multiples placed on the valuation of startups, especially tech-based startups. This could affect future fundraising valuations.

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