The bible
says in Genesis 41:29-30 that, seven fat years in Egypt will be followed by
seven lean years in the time of Joseph. It was to warn the profligate children
of Egypt to reduce their ostenta-tious and extravagant ways. They were advised
to save some wheat or grain in preparation for the tough times ahead.
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| Rewane |
Even in
biblical times, the cyclicality of economics was acknowl-edged. Therefore, it
is surprising that various Nigerian admin-istrations in the last 20 years
failed to heed this basic principle of putting something aside for the rainy
day.
I am
saying this today to illustrate the Macro-economic Cul-de-sac which Africans
largest economy and country by population is fac-ing. The country is confronted
by its steepest decline in oil reve-nue by 57.25% to $4.12bn, leaving a
significant shortfall to fund the budget for 2016. The funding gap which
translates into an amount of N2.2trn is 1.93% of GDP. The countercyclical
budget is meant to stimulate the economy into the path of recovery. There is
also the more profound issue of the external sector im-balance resulting from
the acute shortage of foreign currency par-ticularly US dollars from oil.
This
external shortfall in dollars resulting more from the sharp fall in the yield
(spread) for a barrel of oil which has fallen by 91.57% from $95pb to $8pb.
This is more than the 65% fall in the nomi-nal price of oil in the market. In
the good old days, the quarterly dollar inflow was in excess of $18bn per year.
This is now down to a paltry $8.48bn. The effect of this picture is that the
Nigerian economy is now tottering on the edge of an extended period of slow GDP
growth.
This is
happening at a time of a crisis of false expectations. The people had been
conned into believing that the economy was in good shape by an outgoing
administration that tried to paint an optimistic picture to a miserable
electorate. This paper is to situ-ate the current Nigerian situation in the
context of the global com-modity crisis and seek to project the likely outcome
in 2016, in what can be best described as a year of economic turbulence.
In
layman's language, we can say that most Nigerians should fas-ten their seat
belts in anticipation of the rough tide ahead. The first question that needs to
be addressed is what is the current commodity crisis and is it different from
previous ones?
The
present commodity crisis has its origin in the unexpected slow down in China.
The Chinese economy had been growing in double digits for a decade. Therefore a
decline to 7% in the last 2 years had major repercussions to global commodity
producers. The $10.36tn economy, which is the second largest in the world, had
to cut back on its demand for many primary and secondary prod-ucts. This also
coincided with flat-lining in the Eurozone, which is also the 3rd largest
market in the world.
The EIU
expects the four year slide in agricultural commodity pric-es to come to a halt
in 2016 – 2017. The EIU FFB index fell by 18.2% in 2015, extending average
annual declines of 5.4% in 2012 -2014, but it will recover some ground in the
coming two years, rising by 3.4% in 2016 and 4.9% in 2017. Tightening mar-kets
will be the prime drivers of this increase. Global demand for food and
beverages will continue to grow steadily, underpinned by demographic and income
trends.
This is
the global picture of agricultural commodities. On the oth-er hand, we see the
outlook for the oil market has deteriorated sharper than we originally
anticipated. However, the consensus is that in spite of geographical tension
and the distortions created by the Saudi attitude towards forcing oil prices
down, that we should see some recovery in oil prices during the year. The EIU
says al-so that ―although the oil supply – demand balance will tighten, putting
upward pressure on prices, we do not expect crude oil price to come back to
pre–2014 level in 2016/2017‖. Despite a dip in U. S. production, global crude
supply will expand further in 2016 on the back of continued output growth from
OPEC and to a lesser extent Russia.
Therefore,
the revenue and foreign exchange earnings picture for Nigeria in 2016 will
remain bleak to challenging. For example, the price of oil has been below 50pb
for over 15 weeks. This has blown a huge hole in the budget of the FGN but more
for the states. The Nigeria budget of 2016 is based on a benchmark price of
$38pb which is very conservative in real terms, but will be test-ed in a market
that is now trading at $33pb. What does this mean to the two main economic
constituencies?
The
Government
The FGN
has accepted that the party is over. In other words, a reality check.
Luckily,
the Nigerian electorate endorsed the APC government be-cause of its lack of
trust and confidence for the PDP. The APC have not shown a proper understanding
of economics and are still trying to figure out what the problem is. It has run
out of time, because the honeymoon is over. Now the government has to re-ignite
the economy to life and simultaneously convert economic wealth into economic
well being for the people.
Therefore,
the key decisions that will put the economy into a path of general dynamic
equilibrium requires for the reduction or possi-ble elimination of subsidies.
This will reduce distortions, increase government revenue whilst empowering the
government to fund the social safety net for the poor and underprivileged. The
Feder-al government is embarking on an ambitious fiscal programme increasing
its spending by 25% at a time when revenues are sharply lower. It is to make
three critical decisions
The
removal of subsidies, which will reduce expenditure by N1trn or 25% of the
previous budget. It will automatically increase available revenue for sharing
by the same amount for the states of the federation. This singular and
important decision will not on-ly change the economic destiny of Nigeria but
also reduce its im-port bill by over 20% and allow the Naira some breathing
space. What is happening is that Government has refused to accept that market
economics works in African countries. That economic re-form is not incompatible
with patriotism. The fundamental mis-conception that a strong currency is
synonymous with a strong economy is defining the national economic narrative.
Therefore, we see a Central Bank that is attempting to defend a currency at a
value which is unsustainable. It therefore appears to send panic and frantic
signals into a market that is extremely nervous.
The CBN
means well but is confusing economic agents with mixed signals. Therefore the
key issues facing the government are the fact that adjustment of the Naira is
now imminent, inevitable and imperative. This adjustment will have huge
consequences for government finances, investment flows, export values and trade
patterns. There will be short term pain, but medium term gain. Therefore what
do we expect? The currency will be allowed to glide into a path of
quasi-equilibrium. An initial band of 185-220, will open the floodgates of
demand, but will also encourage some investment inflows. Foreign Direct
Investment in 2011 was as high as $8.1bn and fell to $1.4bn in 2014. However,
FDI had crashed to near zero in the last few months.
Nigeria‘s
gross external reserves are now below $29bn and can barely cover 4 months of
imports and payment. Therefore any resistance to a currency adjustment and the
adoption of a policy framework that allows for appreciation of the Naira when
the fun-damentals improve and slide when conditions deteriorate will be fool
hardy. Therefore, the Nigerian public have run out of pa-tience and now want
forex availability at a market price instead of rationing that is open to
abuse.
The Beauty
is that the people, the markets and the CBN have the same objective i.e. to
ensure macro-economic stability. Therefore in 2016, we expect an adjustment of
approx 10-15% of the Naira even after oil prices recover. We believe that the
import bill will fall by approximately 20 -25% because of the fictitious import
of
Investors
& Manufacturers
These are
the foot soldiers of the economy, especially the small and medium scale
industries. They want to see government ex-penditure increase and translate
into consumer spending and ac-tivity. They had enjoyed a subsidized exchange
rate, rent seeking pricing in government contracts etc. This group will need to
come to terms with a more efficient government, fiscal system, devoid of ghost
workers and leakages and where productivity will be the key determinant of
reward.
However,
the FGN will need to put many things in place for this to happen, not to say
the least being the hiring of capable hands and firms to help recalibrate the
way government works.
The
efficiency unit of the Finance Ministry is already kicking in the correct
direction. The availability of forex and the relaxation of controls are
critical to empowering these investors and manufac-turers. The lowering of
interest rates has not translated into more loans. This is because loans are a
function of risk and liquidity, not of lower interest rates alone. The markets
now have come to accept the inevitability of a change in policy. The government
is now in the best position to capitalize on the mood of investors and the
people to accept the new economic order.
The
beneficiaries of economic injustice in the guise of local con-tent and economic
added value , will need to be competitive. This is because the FGN is going to
provide a level playing field to en-courage new investments. The advantage of
investment over debt is that it brings with it cash, technology, employment
which are critical to the Buhari agenda. Therefore, the markets are will-ing
and ready for new investments in the magnitude of $5 - 10bn in the next
eighteen months. The markets are also expecting that Nigeria will raise $4.5bn
of external debt from multiple sources including the Eurobond markets,
multilaterals and the Paris Club. The conditions precedent to the borrowing
will help instill fiscal discipline and strengthen the hands of Buhari's strict
agenda.
One sector
that will be in treacherous waters is the banking sys-tem. This industry in
2016 will be under margin compression pressure. The final removal of COT and
the Single Treasury Ac-count will wipe out at least 20% of revenues. This
combined with the slash in forex availability means that trade finance activity
will nose dive. Therefore, it is imminent that banks might have to slash their
workforce and compensation. This will become even more pressing because of the
loan quality problems now plaguing the industry. Attempts to recapitalize will
be difficult and futile because of the slump in share prices of banks.
Therefore, this will be a tough year for banks. Yet, we believe that there will
be a rejuvenation of the cashless policy which will lead to new efficien-cies
in the payment and settlement space.
The
outlook therefore is for new investments, more currency and trade flows but at
a Naira exchange rate that is adjusted for the sharp fall in oil prices. I will
like to end this piece with an objec-tive assessment of the economic outlook.
The good
news is that huge resources both from private and pub-lic sources will go into
productivity sensitive infrastructure pro-jects especially road, transport,
rail and marine, power and hous-ing sectors. This will be at the expense of the
consumer goods sector. We will see gross capital formation spike to 15.7% of
GDP or $77bn. This will be followed by a gross multiplier effect on GDP leading
to a growth recovery to 4 - 5% in 2017
The
tough news
The state
governments will remain technically insolvent through-out 2016. Some states
like Lagos, Rivers, Akwa Ibom will coast along, others might need to fire staff
and rationalize their expec-tations and expenditure.
The CBN
will develop a more pragmatic exchange rate policy that allows it the
flexibility to strengthen the Naira when things get better and adjust when
necessary. The removal of subsidies will make the work of the CBN much easier
than at present. External Reserve management will be a major thorn in the flesh
of the CBN. It will need to decide, how much of this asset it will use to
support the Naira with infrequent interventions. The delicate bal-ance between
reducing interest rates to accommodate the fiscal growth objectives of the
finance ministry and attracting interna-tional investment flows when the U.S.
has increased interest rates is a major challenge.
In
summary, therefore we look forward to a year of economic re-covery from a low
of 2.34% in 2015 to a high of 3.5 - 4% in 2016. This will be taking place in an
improved macro-economic environment that will reduce uncertainty from high to
medium and risk level from high to moderate.
