NIGERIA OUTLOOK 2019

OPINION

Election years are economically disruptive in Nigeria. The market prices in a perception of heightened country risk . The conventional wisdom is for foreign direct investment is to delay any investment decision pending outcome certainty. There is an economic argument to be made that a continuation of the current administration creates the least disruption.

Whilst a continuity of policy decision making is a preferable outcome of the election, the outlook for Nigeria in 2019 will be more about the effect of external factors and how the Central Bank Bank , the Debt Management Office (DMO) and the Federal Government responds. In recent years policy decision making has been far from joined up. There is a broad intention to diversify the economy away from oil, increase the agric sector and fund budget deficits through external borrowing. The Government inherited a broken transitional energy market, endured a calamitous collapse in crude oil revenues and insurrection in both the North East and Niger Delta insurgency.


The IMF have projected Nigeria's GDP growth for 2019 at 2.3% and depending on who you listen to, projections range from 1.8 to an optimistic 2.5%, up from 0.8% in 2017. If you take the view that GDP growth is not only desirable but a good metric for establishing how well the economy is doing, ( I don't)then any growth in excess of 2% year on year should be satisfactory. I would prefer to use the Gross National Income (GNI) per capita with purchasing power parity (PPP)as a more reliable metric of the prosperity and a clearer indication of well being. Despite sounding like a good name for a Nigerian political party, PPP is essentially a measure complimented by the income per capita of how better or worse off is the man in the street. The last measure recorded for Nigeria GNI per capita in 2017 was US $2,412. which translates to a PPP of USD$5,680.

The difficulty with adopting these statistics is that they are predicated on unreliable numbers. Nigeria's population is variably estimated to be between 180 - 200 million people. Many of whom there is no reliable information, leaving forecasts to rely on the law of large numbers or having to create models which do not apty represent income distribution or pertinent growth rates. Recent reports identified Nigeria has overtaking India as the country with the largest number of people living in extreme poverty, with an estimated 87 million Nigerians, or around half of the country's population, thought to be living on less than $1.90 a day.

Nigeria's population is estimated to be growing at 2.6% per year. This means in 30 years Nigeria will have a population of over 300 million. It is also important to note and the reason I think GDP on its own is a poor metric to measure growth is that if your GDP increases but 0.8% and the population by 2.6%, your GNI per capita will drop. In 2017 transfers from Nigerians working abroad amounted to USD$22bn. Remittances from Nigerians in the diaspora are a significant contribution to the current account with the increase being driven by strong economic growth in Europe, the UK and the US. The transfers also provide a useful addition US dollar liquidity. Maintaining such transfers at that level could prove to be a vital component in managing the exchange rate.

Organised labour which in most cases acts as the de facto opposition to Government policy, have demanded an increase in minimum wage from NGN18, 000 per month to NGN30,000(USD$84.00) an increase of 60%. It is difficult to see how the Government, particularly the State Governments can sholdour such an increase without raising both unemployment and inflation. Yet the Government is vulnerable to civil society organisations lest it enter the election cycle amid a populist revolt and civil unrest.

Civil Society Organisation such as the Nigerian Labour Conference (NLC) and the Trade Union Congress utilise their ability to prompt nationwide strike action to skew Government policy. For example both deregulation in the oil sector, the sale of the nations moribund refinary capacity and the introduction of cost reflective tariffs in the energy sector, have all been vehemently opposed by these Unions. Both of whom are marxist in orientation and anti free market in outlook.

The Central Bank avowed policy is of currency stabilisation and has intervened to maintained the managed per for the I&E window in the 358 -363 range and frequent disbursement to the BDC Operators. Nigeria's exchange rate system is esoteric but seems to work. The official rate, general referred to as the Inter Bank Rate is still artificial pegged at 305- 306/USD$1. The cost is defending the Naira through intervention fpr the first 3 quarters of 2018 reached USD$11.83 bn. The slow down in foreign investment and the increasing inevitability of oil price shock to the economy will be translated into less USD liquidity and increased pressure on the Naira. It also restricts the Central Banks ability to intervene in the market consistently. I predict the Naira weakening after the elections as the ability of the Central Bank to burn through the country's US dollar reserves to support it diminishes


Yields on Government debt securities must rise along with interest rates which currently stand at 14%. The global oil markets look bearish in the medium term which will have the effect of the DMO having to increase yields on Treasury Notes and Bonds to attract investors. All this against the backdrop of the Fed quantitatively tightening and increasing US rate rises making the US Dollar stronger, US Treasuries more attractive and commodities like oil cheaper.

The Government embarked on a process in 2017 of funding a burgoening domestic debt burden with cheaper foreign debt raised in the eurobond market. The idea being that maturing high yield tresury notes could be funded by lower yield eurobonds. Fast forward to 2019, Nigeria now faces real risks as the US dollar strengthens and the country's revenue to debt service, at over 69% seems in dire danger of spiralling out of control. In what can only be regarded as a truely terrifying admisiion of reckless incompetence by the Debt Management Office, not only have they not recognised the exchange rate risks, they have no idea how to deal with them. Like Mexico in 1995, Russia in 1998 and Brazil in 1999 exposure to US denominated debt with a weakening currency is calamitous. The Government will argue that their policy of huge iinfrastructural investment is absolutely necessary. The problem is the investment seem to have created little or no stimulus. In fact power generation has steadily deteriorated.

The transitional energy market which has performed woefully and is bedevilled with debt and the continued subsidy of gasoline will require the introduction of cost reflective tariffs and deregulation in 2019. Both with the huge potential for creating inflationary pressure.

Nigeria has a perverse relationship with crude oil pricing and product imports. It should benefits on the one hand when crude prices are high, but pays more for the refined product which creates a net loss. Given that the NNPC has taken on the mantle of the sole importer of gasoline it is not difficult to see how it spends over US$520m a month as 'under recovery' a term widely used in India but adopted as a synonym for subsidy in Nigeria. The subsidy creates a huge burden on foreign exchange and I predict the subsidy will go when the market is deregulated after the elections as will the 3 local refineries.

 

The Power sector is in complete dissaray. If the actors sole intentions were to act in such a shambolic manner as to ensure the total failure of the sector they could not have done a better job. It is difficult to know where to start but Nigeria needs electricity and vast sums have been invested to little effect. I suspect that the evolving 'Eligable Customer' policy will drive the need for a cost reflective tariff which along with metering is the basis of market success. There are ongoing project concieved to upgrade the transmission network and signs that enabling policy decision making is becoming more effective but Nigeria has one of the lowest electricity generation per capita in Africa averaging 4,000MW of production for 200 million people. There is a measure of economic activity and GDP growth which calculate the increase in artificial brightness over a country at night time to ascertain economic growth. The metric is predicated on the notion that increased economic activity is facilitated by electricity which enhances productive capacity. It might be a suitable alternative for Nigeria in 2019.

Foreign Direct investment has a key role to play in the Nigerian economy yet the omens do not appear portentious at the moment. Both UBS and HSBC have recently closed their rep offices in Nigeria. The latter after being accused of money laundering in the wake of injudicious ill advised criticism of the Presidents ability to stimulate the economy. The recent contretemp between the CBN and MTN has created distrust in the regulatory and legal environment. MTN once the poster boys for FDI in Nigeria have endured a long running saga with NCC, the regulator and the CBN. There is a concern that investor confidencence is being eroded by these onerous financial penalties. It certainly does not help when the Office of the Attorney General of the Federation usurps the role of the regulator from up on high. There are unquestionably governance issues and a World Bank ease of doing business ranking of 146 out of 190 countries surveyed is unhelpful in restoring confidence.

Foreign investment in the Nigerian rose by 114 percent, year-on-year, to $14.6 billion in the nine months to September 2018. Admittedly from a low base in 2017. Investment was driven by exchange rate stability, increases in crude oil receipts as the market improved and attractive yields on fixed income instruments. General elections , the likelihood of a prolonged global oil bear market resulting in weakened crude oil prices and the Fed interest rates hike create significant impediments to sustained growth.

The House of Assembly has harmonised a far from perfect Petroleum Industry Governance Bill (PIGB) which the President has finally agreed to sign. It is not the panacea that the industry requires, facing criticism from many stakeholders including the NNPC. It remains to be seen the extent to which it will act as a catalyst for investment in 2019. Nigeria has not conducted a bid round for over a decade. Any such bid rounds would be carried out in accordance with the PIGB. It is unclear when the other 3 Bills envisaged by the Petroleum Industry Bill will be enacted into law. The PIGB crucially unbundles the NNPC, creates a new regulator 'The Commission' and changes the way the successor companies fund their contractual obligations. The Ministry of Petroleum Resources have touted a bid round since 2017 and it is not a foregone conclusion that one will take place in 2019. There is still the onerous task of unbundling the NNPC which if experience is any guide will be no mean feat

 

 

 

 

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