Experts Size Up Nigeria’s Prospects

By rights, the past 12 months should have been a time of abundance for Nigeria.
The global price of oil, the commodity that provides 56 per cent of government revenue, has jumped 40 per cent, while the virtual cessation of militant activity in the oil-rich Niger Delta has allowed crude production to stabilise.
Yet the IMF has downgraded its forecast for Nigerian economic growth this year from 2.1 per cent to a sluggish 1.9 per cent. While an improvement on the 0.8 per cent growth eked out in 2017 as Nigeria crawled out of a recession, this would be the third straight year in which economic growth has failed to match population growth.
Worse still, the IMF is predicting that income per head will continue falling until at least 2023, a painful squeeze for a country with gross domestic product per capita of just $2,000.
There have been some successes. Aside from tackling the militant threat in the Delta, President Muhammadu Buhari has largely beaten back an insurgency by the Islamists of Boko Haram in the north-east of the country. Nigeria has, though, been hit by an upsurge in violence between Muslim herders and Christian farmers in the country’s Middle Belt.
Higher oil prices have at least helped the government and central bank hold the naira’s official exchange rate at 305 to the dollar and the interbank rate, used by many importers and exporters, at 360, while simultaneously tackling a shortage of dollars that debilitated many importers.
However, while this has allowed inflation to fall from highs above 18 per cent, it remains stuck in double digits, preventing the central bank from stimulating the economy by cutting interest rates below 14 per cent. Rising debt servicing costs are eating up an ever larger slice of government revenues.
Attention is now starting to turn to February’s presidential election, when Atiku Abubakar, a former vice-president, will be President Buhari’s chief rival. While a Buhari victory would be seen as a continuation of business as usual, Mr Abubakar has pitched himself as a successful businessman ready to jump-start the economy and attract foreign investors by liberalising the oil sector and cutting the federal budget deficit, a strategy some fear could depress growth further in the short term.

Below, experts from a range of investment and advisory companies discuss Nigeria’s challenges.

The economy: tepid oil-driven recovery likely to continue

The recovery from the recession of 2016-17 has been tepid, despite rising oil prices, with 2018 set to be the fourth straight year of declining GDP per capita. What are your expectations for growth in 2019? What would Nigeria need to do to push growth above the population growth rate of 2.6 per cent?

John Ashbourne: We think growth will actually slow in 2019. It’s important to remember that 2018’s very poor performance came against a backdrop of high oil prices, rapid global economic growth and stable oil production. None of these are guaranteed next year; indeed we think that oil prices will decline and there is a risk that election-related violence could disrupt production. Moreover, the election will probably disrupt implementation of the 2019 budget, so fiscal policy will tighten. We’ve pencilled in a slight deceleration from 2.2 per cent year on year in 2018 to two per cent in 2019. The risks to this are, we think, mostly to the downside. The government needs to unlock private sector investment by improving the business environment and encouraging participation in the non-oil sector. The country also desperately needs better infrastructure and reforms to the state-dominated oil sector.

Yvonne Mhango: Year to date, the Nigerian economy has underdelivered; growth has come in weaker than we expected, and monetary policy committee chatter has swung from rate cuts to hikes. First-half growth was weaker than our expectation of 2.5 per cent due to a slowdown in crop production, a weak consumer and a decline in oil and gas production. Although the non-oil sector’s growth continued to improve, driven by telecommunications and construction, the biggest sectors, including agriculture, trade and manufacturing, are not participating in this recovery. This explains the revision in our growth forecasts to two and 2.5 per cent in 2018 and 2019, respectively, from 2.9 and three per cent previously.

Michael Daoud Irsaneous: We are expecting growth to accelerate, driven mainly by increased government spending ahead of the presidential elections next year with some upside risk if the central bank decides to cut rates. However, that is a tough decision right now given rising interest rates in the west and impact it will have on the carry trade.

Razia Khan: We expect three per cent growth in 2019, following our recent downward revision to the 2018 growth forecast to only 1.8 per cent. In an environment of higher oil prices, an acceleration to three per cent should not be very difficult to achieve. Ultimately, Nigeria has all the necessary building blocks to achieve much faster growth. With its low base, youthful population and scale, a growth rate that exceeds the rate of population growth should be easily achievable. It needs to develop institutions that are more resilient than tends to be the case in typical resource economies, for example a tax base independent of oil and a banking sector that can meet the borrowing needs of the private sector. Nigeria has failed to make a transition away from being an oil economy.

Charles Robertson: Since the oil price fall of 2014, Nigeria has not matched the 2 per cent per capita gross domestic product growth seen over 1992-2017. As Nigeria has grown at 2 per cent per capita since 1992, our medium-term base should be at least 4-5 per cent GDP growth. But Nigeria cannot match the 4-6 per cent per capita GDP growth of industrialising countries because adult literacy at 60 per cent is too low and electricity consumption is under half the minimum required level for sustained industrialisation. To push headline GDP growth to 6.5-8.5 per cent would require an adult literacy campaign, a trebling of electricity consumption and a doubling of investment to GDP.

Inflation: No end in sight for double-digit figure

Inflation is likely to remain high for the foreseeable future © Getty
After falling earlier in the year, inflation appears to have plateaued in the 11-12 per cent range. Is this fine for Nigeria, or is it problematic, and if so what needs to be done to bring it under control? How long can Nigeria maintain the naira’s dollar peg when inflation at this level is pushing up the currency’s real exchange rate?

John Ashbourne: Inflation might ease a little bit, but structural factors will keep it elevated. Maintaining the currency peg is, over the long term, unsustainable but President Buhari seems committed to the current policy and the recent rise in oil prices has provided the central bank with sufficient forex reserves to maintain the policy over the short term. Given that there is not enough pressure to force the government to abandon the policy, it will probably remain in place until the government changes its mind, which could come next year if Mr Abubakar is elected.

Michael Daoud Irsaneous: The absolute level might seem high but the trend is more important. It has been trending lower since 2017 with a small rise maybe in August but it’s not alarming. The rate decision and forex policy is a not as straightforward as other markets. The ideal scenario is for the central bank to lower rates to stimulate the economy, but in the current global backdrop with rising rates in the US, lower rates are not much of an option as they reduce the appeal of the carry trade, impact portfolio flows and put more pressure on the currency. The central bank is committed to the currency peg and has the reserves to defend it for now but there should be some pressure to depreciate given the declining reserves and rising inflation.

Razia Khan: Foreign exchange competitiveness is an issue for Nigeria and a symptom of its long-term susceptibility to the ‘resource curse’ and overreliance on a strong forex rate. The big issue is the understandable preference among Nigeria’s population for a strong forex rate. In the near term, forex depreciation brings about higher prices in the import-dependent economy, causing more consumer pain — with little to show for it in the way of lasting competitiveness gains. Unless Nigeria can overcome supply side constraints, like the significant infrastructure deficit, then no amount of nominal depreciation of the forex rate is going to bring about meaningful, lasting competitiveness. This is the resource curse, in a nutshell. In the long term, this seemingly stable forex rate policy makes Nigeria more susceptible to bigger, potentially more damaging forex corrections as the “fix” needed for an overvalued forex rate becomes much greater.

Yvonne Mhango: We think the risk to interest rates is to the upside, in the short term, owing to emerging inflationary pressures, in part due to an expansionary budget. Nigeria’s inflation rate is the only one among the sub-Saharan African countries under our coverage that is above 10 per cent, where we see it remaining over the medium term. Our base case is that the policy rate will be held at 14 per cent for the short term. The naira is no longer particularly cheap based on our real effective exchange rate analysis. Our fair value estimate is now 346 to the dollar (versus 322 in the second quarter), implying the naira is only 5 per cent undervalued (versus 12 per cent). We think the naira will have to weaken in 2019 to avoid becoming too overvalued. We now see the forex rate at 395 at the end of 2019, versus 360 previously.

Militancy: human cost high but economic hit weak

Militants patrol the creeks of the Niger Delta © AP
Although militancy in the Niger Delta has waned and Boko Haram has been pushed back, the latter still remain active and there has been a rise in violence between Muslim herders and Christian farmers in the Middle Belt and an insurgency in Biafra in the south-east of the country. Our experts were asked how these issues would play out and how damaging they would be to economic growth.

John Ashbourne: Violence in the Middle Belt has a horrible human cost but the effect on the national economy is very limited. Violence is mostly contained in rural areas in economically peripheral states. Even an increase in this conflict probably wouldn’t have a big impact on headline GDP, though it would obviously be a disaster for the country in other ways. Violence in the south-east, on the other hand, could pose a significant economic threat if militants cut off oil production. Indeed, this is probably one of the big risks to growth in 2019.

Yvonne Mhango: The sharp slowdown in agriculture’s growth in the second quarter underscored the significance of the impact of violence between Muslim herders and Christian farmers. We believe the slowdown in crop production, with year-on-year growth falling to its slowest rate this decade, 1.5 per cent in the second quarter versus 3.2 per cent a year ago, was in part due to the herdsmen-farmers conflict in Nigeria’s Middle Belt.

Razia Khan: So far, Niger Delta militancy has been less of an issue. Rising oil revenue may provide sufficient resources to maintain relative quiet. There are mixed opinions on the farmer-herder clashes in the Middle Belt. This is a significant security issue, although many in government also feel that the severity of recent clashes, and the preponderance of “fake news” aimed at intensifying the conflict and sectarian differences, may be driven by opponents hoping to earn political capital as a result. Security, especially in the north-east, which has been impacted by the Boko Haram insurgency, played a key role in the election of President Buhari in 2015. Initially there were successes but the recent frequency of attacks suggests that the Boko Haram insurgency is not entirely contained.

Michael Daoud Irsaneous: Boko Haram attacks are now more in the form of bombings and less like a full-frontal military activity, which is one of the successes of President Buhari. The switch in tactics might prove challenging to control, though, as these suicide attacks are hard to defend against. The rise of sectarian issues in the Middle Belt is definitely concerning. I think those two issues will continue to be a headache for the administration for some time until they can get it under control. The militancy issue could be disruptive to oil production while the violence among farmers in central Nigeria could have an impact on food inflation if we see disruption of food production.

Charles Robertson: Nigeria’s economy is probably as immune to conflict in the subsistence economy of the north-east as Turkey was in the 1990s to its terrorist challenge from the [armed Kurdistan Workers’ party] the PKK. Insurgency in the Niger Delta is the biggest threat to the Nigerian budget and potential investment by the government.

The stock market: political knocks hamper growth

Nigeria’s stock exchange has weathered a sell-off © Bloomberg
Equities have fallen 13 per cent this year, admittedly against a backdrop of weaker equity markets across emerging markets. Has Nigeria just been swept up in the broader sell-off, or are there particular reasons why the index has fallen so much? Where do you think the market will go in the next 12 months?

John Ashbourne: Worries across emerging markets have played a role, but Nigeria’s slow growth has also depressed local equities. The index has also been hit by the knock to confidence caused by the government’s decision to fine [South African telecoms group] MTN, which many analysts saw as another sign that Nigeria is a difficult and unpredictable regulatory environment. Given weak growth and increased worries in the lead up to the election, I expect that equities will perform poorly over the coming few months. The result over the rest of the year will depend on the presidential election, and how the winner signals the policy direction. A win for Mr Abubakar — who has promised to deregulate portions of the economy and liberalise the forex system — would probably give a boost to equities.

Razia Khan: The performance of the Nigerian equity market can be explained by a mix of global risk aversion, and investor concerns over the business environment, given the way in which the MTN issue was dealt with. As an oil producer, the recent decline in the NSE index — at odds with a better economic outlook — is surprising. A strong economic reform focus post the election might favour some recovery in the NSE.

Michael Daoud Irsaneous: We believe that the weaker sentiment for emerging and frontier equities [is largely behind] foreign equity investors being net sellers of Nigerian equities this year versus net buyers last year. However the weaker growth environment and uncertainty over the political situation has not been helping.

Charles Robertson: Nigeria has marginally outperformed the fall in the MSCI Frontier Market index in 2018, but has disappointed us as its GDP growth has not kept pace with population growth.

John Ashbourne: The early signs point to a close race. Polls suggest that President Buhari is unpopular in much of the country, though he retains his lead in the populous northern states, and the incumbent will have a strong financial and administrative advantage. His ruling party has managed to retain power at the state level in recent elections, suggesting that the party’s political machine is continuing to operate. All in all, we think that President Buhari is probably the favourite at this stage. But the election is at an early stage and [opposition People’s Democratic Party challenger Atiku] Abubakar has yet to get his campaign into gear. A victory for President Buhari would result in policy continuity. A win for Mr Abubakar offers the chance of a significant policy shift. The opposition leader has promised to reform the forex system, cut federal spending, and liberalise the oil sector. These moves could, in theory, boost economic growth over the long term, though they might actually depress growth in 2019 itself.

Michael Daoud Irsaneous: It is tough to take sides but the general feeling is that the current president didn’t really fulfil his promises. His health remains in question with no clear disclosure and many health-related trips outside of the country. Defections from his party indicate that his support is on the decline. He has had some successes, like fighting Boko Haram, combating corruption and setting up a single treasury account to limit the leakage from government finances, but the Middle Belt that helped Mr Buhari win the election in 2015 is currently unhappy with the sectarian violence and the lack of government response. These elections will be tough for Mr Buhari and the margin of victory or loss will be very slim.

Charles Robertson: This will be a tough election for President Buhari to win after four years of declining per capita GDP. Mr Buhari was unfortunate to win the 2015 election when the oil price was collapsing. His anti-corruption stance would have been ideal when oil prices were high. Mr Abubakar, his main challenger, has already positioned himself as the pro-business candidate who will unify exchange rates and get Nigeria moving again. Whoever wins in 2019 will inherit a stronger economy than in 2015 and their economic record is likely to look stronger.
Source: Financial Times

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