My latest contribution to Alterio’s weekly market review introduces two new metrics–the “original sin” calculation mentioned in my previous post which plays upon a theme explored by Barry Eichengreen, Ricardo Hausmann and Ugo Panizz back in 2003, namely per Paul Krugman “the long-standing notion that developing economies are especially vulnerable to financial crises because they borrowed in foreign currency” (though as Krugman aptly noted last fall even ‘developed’ countries have succumbed to said sin, one of several conundrums at the core of Europe’s existential crisis). The second is a derivation of John Taylor’s guideline for central bank interest rate manipulation that we hope will help shed light on the degree to which a given sub-Saharan monetary policy committee may be ‘ahead’ or ‘behind the curve’, so to speak.
The exercise in part validates our present OW position in Nigerian debt given current trend dynamics for foreign reserves that help ease an otherwise [comparatively] high short-to-long term external debt ratio. Moreover, the fact that Nigeria’s policy rate sits wholly inline with our Taylor Rule inspired target, along with our projection that regional inflation rates have peaked while pass-through effects from Nigeria’s recent, partial fuel subsidy lift are likely to be transitory in nature. To that end today’s inflation announcement for January, while 12.6% y/y compared with 10.3% in December was less pronounced than initially feared and moreover the naira’s continued strength (a function in part of crude) should act as a tempering headwind in the coming months such that the CBN’s 575bp front run of rates last year may have already effectively priced in even a temporary, H1 rise in inflation.