Hard times may soon be over for Nigeria
Economy set to beat recession next year, say economists
RISK-averse South African companies that are staying put in Nigeria, which is experiencing its worst recession in decades, might not have to wait too long for a reversal of the crippling downturn that has seen fuel shortages in which airlines compete with local consumers.
Nigeria’s economy shrank by 2.06% last month, resulting in a second quarter of decline this year and marking the country’s worst recession in 29 years.
This has made an already tough economic climate even worse for the major oil exporter after oil prices collapsed two years ago. Among the challenges is a super-high inflation rate of 17%. In June the Nigerian government allowed its battered naira currency to trade freely after fixing it in February last year to prevent it falling as oil prices plunged. The resultant black market trade in dollars damaged the economy.
But the light at the end of the tunnel may be closer than some think, said London-based Capital Economics economist John Ashbourne.
As early as the first quarter of next year, Nigerian economic growth could improve to 2.5% — and in the next two years it could reach 3.5%. (In the past Nigeria has reached growth rates of 6% and 7%.)
Ashbourne said Nigeria’s problems in the first half of the year were due to a drop in global oil output and not disruption of oil production in the Niger Delta. “It’s pretty unlikely that production will fall as much again. It’s already at a 20-year low. Provided that oil output stabilises in volume terms, that should remove a pretty big weight from the economy.”
Brent crude oil is expected to lift from $45 a barrel to around $58 a barrel by the end of next year.
Among South African businesses that have left Nigeria in the past few years are Woolworths, Truworths, Foschini and Tiger Brands. Sun International decided to leave for other reasons besides weak growth, such as clashes with shareholders.
But other companies have taken a different view. Ben Kruger, Standard Bank South Africa joint CEO, regards Nigeria as a growth economy and said that although the economy could end the year in recession, there will be recovery next year. “From a macroeconomic point of view the recovery next year will still be slower than what people think — but I think in two years we would definitely start expecting Nigeria to grow again, closer to the levels where it had been growing.”
Nigeria’s size, with a population of about 180 million, was a strong drawcard and the market presented an opportunity for lending, which was low in Nigeria, said Kruger. Standard Bank’s personal wealth business in Nigeria is performing well and its relationships with multinationals are growing. Kruger said it was encouraging to see that many multinationals were still investing in Nigeria.
However, Martyn Davies, MD of Emerging Markets and Africa at Deloitte, said there was still no sight of green shoots in the economy. “The economy and asset value need to correct and this will take more time.”
Nevertheless, several South African companies are taking an optimistic view. Massmart opened a Game store — its fifth store in Nigeria — at the new Lekki mall in Lagos last month. It will open two more stores in Nigeria in the next 18 months — despite poor logistics infrastructure that hampers deliveries and the difficulty in finding suitable sites for stores.
Cape Town-based Novare Real Estate Africa, which developed the Lekki mall, said the number of shoppers in its malls had not declined, despite the recession.
Derrick Roper, CEO of Novare Equity Partners, an associate of Novare Real Estate Africa, said: “We are seeing a resilient underlying consumer. For example, many [Nigerian] consumers who used to do their shopping in the US, South Africa or Europe now do it in the country.”
He believed the Nigerian economy was at the bottom of its cycle.
In Abuja, Novare will launch a mall late next year and an office and shop development in 2018.
Mike Whitfield, Nissan South Africa MD, expected the Nigerian recession to hamper local sales and the supply of components and vehicles from South Africa in the short term. However, he said, the government intended to diversify the economy beyond oil and manufacturing and this would spur growth. As Nigeria was an important regional hub for Nissan, the company was not solely reliant on the local economy, he said.
SAA spokesman Tlali Tlali said the airline was refuelling in Nigeria and had not reduced flights — unlike other international airlines which are reportedly refuelling outside the country because of pricey Nigerian jet fuel.
Reuters reported that the scarcity of fuel has pitted some airlines against local consumers. There is a surge in demand for kerosene for heating and cooking during the rainy season, when wood and charcoal are not readily available, and if airlines do not pay up, marketers will sell to locals.
Tlali said passenger numbers had increased by 11%. “Passengers to and from most of our regional destinations are not deterred by recessionary trends. They are resilient and travel for their own purposes.”
But Dianna Games, executive director of the South African-Nigerian Chamber of Commerce, said business confidence in Nigeria was low. Official figures published last month showed a decline in 15 of the 16 manufacturing subsectors.
Games said Nigerians were hoping for relief from the government, but it had not materialised “despite the president quite regularly saying he is aware of the hardships”. — Additional reporting by and Dineo Tsamela
In two years we would definitely start expecting Nigeria to grow again
NIGERIAN President Muhammadu Buhari’s tenure, still in its infancy, can so far be characterised by a number of blunders — the adoption of unorthodox policy, delayed implementation of his budget and exclusion from the JPMorgan bond index. Furthermore, the president inherited structural constraints, ranging from infrastructure shortages to elevated corruption and policy and security concerns, which will continue to cast a dark shadow over the growth prospects of the Nigerian economy.
The contraction of Nigeria’s GDP in the second quarter therefore comes as very little surprise given the policy mishaps that followed the decline in the oil price — Nigeria’s main source of export revenue — which has weighed immensely on the country’s terms of trade.
In the second quarter , GDP declined 2% year on year from 0.4% in the first quarter. Oil GDP plummeted into deep negative territory (-17.48%) due to a notable reduction in production, which has been disturbed by attacks on pipelines by the Niger Delta Avengers.
Should this persist, it is difficult to see how Nigeria will lift itself out of these recessionary conditions.
Persistent weakness in the non-oil sector — the largest contributor to economic activity — is particularly concerning. Import restrictions imposed by the Central Bank of Nigeria with the aim of defending the naira’s peg to the dollar accelerated the deterioration in non-oil GDP. The restricted items were mostly intermediate goods that are essential for manufacturing.
Non-oil GDP declined -0.4% year on year in the second quarter from -0.2% in the first quarter, led by a sharp decline in industry, which fell -9.5% year on year from -5.4%, and a deterioration in services GDP, which was down 1.25% from 0.8%. The slump in GDP was, however, limited by a pick-up in agricultural production.
Higher inflation, monetary policy tightening, low oil prices and low levels of confidence are likely to continue to weigh on demand growth. Credit demand is already contracting and indicators of manufacturing production continue to fall. As such, overall real economic activity is expected to remain weak unless oil prices recover notably.
The only way Nigeria can lift its growth constraints is by attracting foreign capital to fund infrastructure growth and domestic consumption. Unfortunately, foreign investors have reacted negatively to the central bank’s attempts to limit hard currency and many portfolio investors have moved their investments out of the country.
Furthermore, the Central Bank of Nigeria’s foreign exchange policy is seen as unsustainable by the market and any possible investments into the country have been stalled by expectations for large future currency devaluations. Fiscal policy uncertainty remains high.
Inflationary pressures also continue to mount. Headline inflation has been running above the central bank’s 6-9% target for just over a year with no clear indication of it returning within target any time soon. Data released by the National Bureau of Statistics showed that headline inflation rose 17.1% year on year in July from 16.5% in June. Core inflation increased 16.9% year on year, up 0.7 percentage points, driven by persistent structural issues, specifically the power and energy challenges facing the country.
Food inflation in particular rose to 15.8% from 15.3% in June.
Structural challenges aside, the near-term outlook for Nigeria remains uninspiring. The current account deficit and negative real policy rate imply the naira will continue to weaken. In turn, this will push the inflation rate even higher. Consequently, the central bank in all likelihood is not yet done tightening given that persistently high inflation discourages savings and further compromises the central bank’s efforts to attract foreign investment. While rate hikes will likely deepen the recession, they would be positive for the naira.
The outlook for what was recently one of Africa’s shining stars is poor.