2018 Prom­ises Re­lief Af­ter Nige­ria’s Re­cent Eco­nomic Woes

Financial Nigeria Magazine - - Contents -

“Time heals all wounds.” In Q3 2014, the prices of crude oil started a down­ward spi­ral. Pol­icy mis­steps by the ad­min­is­tra­tion of Pres­i­dent Muham­madu Buhari later com­bined with the tum­bling oil prices, re­sult­ing in the con­trac­tion of the Nige­rian econ­omy through­out 2016. How­ever, that price cy­cle has ended. Since Q2 2017, the econ­omy has be­gun to muster growth. The hith­erto pal­lid eco­nomic re­cov­ery is ex­pected to strengthen in 2018.

There are three key con­cerns about the Nige­rian econ­omy this year. One, con­tin­ued move to­wards in­ter­est rate nor­mal­iza­tion in the United States may hurt the lo­cal fi­nan­cial mar­ket through a re­ver­sal of fi­nan­cial flows. Two, a black swan – pos­si­bly a dis­as­trous geopo­lit­i­cal event, or a dis­or­derly cor­rec­tion in the U.S. equity mar­ket – can roil the world’s fi­nan­cial markets. And, three, Nige­ria it­self heads into an­other elec­toral cy­cle that is guar­an­teed to ei­ther dis­tort re­source al­lo­ca­tion or un­der­mine so­cioe­co­nomic sta­bil­ity.

Re­gard­less, the out­look of Nige­ria in 2018 is pos­i­tive. Not only is the ag­gre­gate econ­omy ex­pected to grow stronger, ma­te­rial im­prove­ments in the wel­fare of Nige­ri­ans are an­tic­i­pated. The linch­pin of the eco­nomic re­cov­ery was the de­ci­sion by OPEC and non-OPEC pro­duc­ers, led by Rus­sia, to ex­tend the ex­ist­ing oil pro­duc­tion cuts un­til the end of 2018. Yes, there are risks to the agree­ment. For in­stance, if Rus­sia feels the U.S. shale pro­duc­ers are tak­ing un­due ad­van­tage of the pro­duc­tion cuts, it may re­con­sider the agree­ment. With some OPEC pro­duc­ers likely to fol­low suit, the agree­ment would un­ravel.

But more likely in 2018, the agree­ment will serve as a sta­bi­liz­ing fac­tor for prices at the cur­rent thresh­old of $60 per bar­rel for the Brent Crude. With the bench­mark price of oil at $45 per bar­rel in the 2018 bud­get, we can have sig­nif­i­cant re­duc­tion in the bud­get deficit or build up fis­cal sav­ings in the sov­er­eign wealth fund or the Ex­cess Crude Ac­count, while ac­cre­tion to the CBN’s for­eign re­serves would con­tinue. The macro and fi­nan­cial sta­bil­ity this por­tends for the coun­try would serve as a bul­wark against the tem­po­rary shock that may oc­cur as a re­sult of an en­ergy mar­ket re­align­ment in the course of the year.

This pos­i­tive sce­nario also sup­ports an up­beat out­look of the Nige­rian fi­nan­cial markets. The equity mar­ket, on the balance of both lo­cal and in­ter­na­tional mar­ket dy­nam­ics, is ex­pected to con­tinue to grow. The main in­dex of the Nige­rian Stock Ex­change (NSE) grew by 42 per­cent in 2017.

We see the at­ten­u­a­tion of the risk of a sharp port­fo­lio out­flow from Nige­ria on ac­count of in­ter­est rate nor­mal­iza­tion in the U.S. and, per­haps, the Eu­ro­zone. The risk it­self has been po­ten­tially ex­ag­ger­ated. Very likely, rate tin­ker­ing – in­stead of ag­gres­sive cuts by the US Fed­eral Re­serve and the Euro­pean Cen­tral Bank – will likely hold sway. While aca­demic economists con­tinue to agi­tate over ‘un­end­ing’ ab­nor­mally-low in­ter­est rates in the ad­vanced markets, the gains of wind­ing down the pol­icy that averted the sec­ond Great De­pres­sion dur­ing the 2008 – 2009 cri­sis re­main con­jec­tural. Thus, the cen­tral bankers are likely to con­tinue their cir­cum­spec­tion. Be­sides, Nige­ria’s be­nign fis­cal out­look and con­tin­ued dol­lar liq­uid­ity in the FX mar­ket would give in­vestors com­fort.

The real risk to the Nige­rian stock mar­ket in 2018 would be a dra­matic cor­rec­tion in the U.S. equity mar­ket, which had run even much fur­ther ahead of the real econ­omy in 2017. Whereas the Dow Jones grew by 25 per­cent last year, the US econ­omy was ex­pected to grow by about 3 per­cent. But no one can tell when the cor­rec­tion would oc­cur and if it would be dis­or­derly. How­ever, a U.S. stock mar­ket crash would im­me­di­ately spark a flight to safety, dent­ing the risk ap­petites of global in­vestors who the CBN had de­lib­er­ately courted with its poli­cies in the past year, and who had helped to fuel NSE’s in­dex growth.

If as things ap­pear – the out­look of fis­cal pol­icy is bright, even if not great, and mon­e­tary pol­icy is set to ease – the bank­ing sec­tor growth would seem as­sured. In­deed, the op­por­tu­ni­ties for the banks to con­tinue to grow their top line and profit in 2018 are in lock­step with the eco­nomic re­cov­ery.

In the past two years, bank fi­nanc­ing for the record-level bud­get deficits of the fed­eral gov­ern­ment had com­pen­sated the banks for their loss of pub­lic sec­tor de­posits with the im­ple­men­ta­tion of the Trea­sury Sin­gle Ac­count. The kill the banks have been mak­ing from buy­ing gov­ern­ment bonds will be lit­tle mod­er­ated, notwith­stand­ing the de­ci­sion to re­bal­ance the pub­lic debt port­fo­lio in favour of ex­ter­nal fi­nanc­ing. With the gov­ern­ment non-oil rev­enue op­ti­misti­cally set at N4.17 tril­lion in the 2018 bud­get, ac­tual bor­row­ing could over­run the bud­getary deficit of N2.01 tril­lion. What’s more, as the CBN starts to ease mon­e­tary pol­icy, the banks would be more liq­uid and able to cre­ate risk as­sets in the real sec­tor to broaden their earn­ings.

All of the above bode well for a pos­i­tive wel­fare out­look for Nige­ri­ans. A stronger Nige­rian econ­omy in 2018 would start to re­verse the job losses of the last few years. While the pri­vate sec­tor will lead in job cre­ation as busi­nesses restart or ex­pand their op­er­a­tions, pub­lic sec­tor work­ers will see more reg­u­lar­ity in the pay­ment of their salaries and emol­u­ments.

In­fla­tion is ex­pected to trend down­ward a bit faster, com­pared to the slug­gish pace of 2017. The var­i­ous pos­i­tive de­vel­op­ments in the agri­cul­tural sec­tor, head­lined by its 3.06 per­cent growth in Q3 2017, will sup­port food avail­abil­ity at lower prices and also boost the in­come of the small­holder farm­ers.

The big per­for­mance gap in the econ­omy this year would be in the de­liv­ery of so­cial services. Ac­cess to qual­ity ed­u­ca­tion and health­care would re­main at de­plorable lev­els, fur­ther emas­cu­lat­ing hu­man cap­i­tal de­vel­op­ment and util­i­sa­tion. Also, elec­tion­eer­ing could worsen in­se­cu­rity. As with just about all sit­u­a­tions, the agency of time re­quires com­ple­men­tary in­ter­ven­tions. In de­liv­er­ing so­cial de­vel­op­ment, the com­bi­na­tion of good pub­lic pol­icy is re­quired.

In ef­fect, the peren­nial un­der­per­for­mance of the econ­omy would con­tinue in 2018. Whereas the Buhari ad­min­is­tra­tion has learnt from some of its past mis­takes, it has failed to demon­strate in­no­va­tive pol­icy-think­ing, or suc­cess­fully im­ple­ment its ver­sions of the an­ti­quated poli­cies. Nev­er­the­less, the econ­omy is head­ing in­ex­orably to post-re­ces­sion growth.

We should pro­ceed into 2018 with op­ti­mism. I wish you Happy New Year!

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