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Nigeria: Climbing Out of Recession

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We must continue working hard to expand economic opportunity for all Nigerians. When all Nigerians can eat three square meals, that’s when the real recession ends. We have work to do.

After two years of suffering economic recession, the Nigerian economy has slightly recovered. Thanks to growth in oil production and impressive performance by the financial sector, official report showed the economy grew by 0.55 percent in the second quarter of 2017.

Crash in global oil prices and depleted sovereign wealth fund (from $30 billion to $3 billion under six years) through corruption and looting plunged the promising economy into a minus economic performance in 2015. For an import-dependent country such as Nigeria where even toothpick is sourced abroad, the plummeted foreign earnings led to dollar scarcity which widely constrained economic operations.

For example, manufacturing companies shutdown due to inability to source raw materials, equipment or expatriates. Inability to repatriate dollar earnings forced the US’ Delta Airlines to shut down its Nigerian operations. Banks laid off hundreds of employees by the dozen (a little over a thousand in a few cases).

Another fallout of the dollar scarcity was the natural devaluation of the Nigerian currency as the market threw more naira to buy the few dollars available on the black market. This craziness climaxed at N500 to $1 on the black market (only a year before, the dollar had sold for nearly 40 percent of that).

This was catalysed by the Nigerian President, Mohammadu Buhari’s, refusal to officially devalue the Naira which sold at the interbank rate around N200 to $1. Foreign investors retracted billions of dollars through the capital market knowing the Naira would crash. Economic activities slowed down. Lives suffered. Eventually, the Naira was officially devalued to around N315 to $1, the black market rate crashed to around the same rate and stability gradually returned to the market.

A recession indicates the economy is in bad shape in nearly all sectors of the economy. During recession, businesses post lower revenues, more losses, prices of goods and services sky rockets and jobs are lost. The government also experiences a drop in revenues and finds it hard to fund its developmental obligations.

The Nigerian government can be commended partly, for lifting the economy from its downward trend. The Trans-Forcados pipeline was repaired, which led to output of 200,000 b/d coming back on-stream. Amnesty programme budget for Niger Delta militants, was also tripled. The aggrieved militants were notorious for kidnapping expatriates and vandalizing oil pipelines resulting in losses of nearly 500,000 b/d.

These government efforts contributed to the production rise to 1.9 million barrels per day from 1.7 million last year. According to official statistics released, this is the first time government performance grew since fourth quarter of 2014, when the oil price collapsed.

The finance sector also grew 11.8 percent Year on Year in Q2, as opposed to a decline of 13.2 percent same time last year. This made it the second-biggest contributor to GDP growth in 2nd Quarter 2017. However this was not due to increased performing loans which fuels economic activity. The result is attributed to banks investing in high-yielding government securities, which is profitable on a risk-adjusted basis.

It is noteworthy that Nigeria’s treasury bills yield an attractive 18 percent interest per annum. Factory costs dropped in the quarter after the central bank introduced a window for investors to trade foreign currency at market-determined prices in April, making dollars more readily available to pay for imported inputs.

Monetary authorities also asked banks to start quoting prices on the so-called Nafex currency window, which has almost wiped out a premium of about 20 percent on the black market. The fixing of the FX liquidity issues also showed results as manufacturing, led by textiles, food and beverage companies, grew by 2.7 percent vs. a -5.5 percent last year.

Despite these sterling results, the non-oil sector was weighed down by poor performance from the services sector. The Real Estate sector declined by a slower rate of 3.5% YoY in Q2 2017 vs. 5.3% YoY in Q2 2016. Trade, a good indicator of consumer buying, contracted by 1.6% YoY vs. zero growth over the same period.

Russian investment bank Rennaisance Capital, describes Nigeria’s emergence out of recession as ‘pedestrian’. “We believe the non-oil sector’s recovery will be constrained by sluggish demand, which is reflected in YoY credit growth of -0.1% in July, vs. 19.9% a year earlier,” its Nigerian team wrote in a report.

The second-largest employer of labour in Nigeria, Atiku Abubakar was also unimpressed with the news of Nigeria’s emergence out of recession.

“The news is surely a boost for Nigeria — it tells investors, local and foreign, that our economy is worth investing in. While we rejoice, it’s also important to recognise that economic weakness at the bottom of the pyramid remains. Inflation is still high,” he wrote in a series of tweets.

He furthered: “We must continue working hard to expand economic opportunity for all Nigerians. When all Nigerians can eat three square meals, that’s when the real recession ends. We have work to do.” Pundits have posited that it is still too early and insignificant for the new macroeconomic performance to reflect on the bottom-line of the average Nigerian on the street.

For developing economies like Nigeria, GDP growth rates are often expected to be in double digits while developed economies like the US and UK typically post GDP growth rates of less than 2%. This is because the economy of smaller countries like Nigeria is expected to grow faster than more mature ones.

A GDP growth rate of 0.5% though a good development is quite paltry and will need to improve in the coming quarters for the wider economy to feel the effect. More nominal growth translates to real growth and less erosion of value.

London-based financial analysis organization, World Economics says: “It is too early to speculate if the recovery is built on solid fundamentals for a sustained recovery but the changes reflected are not insubstantial.” Fortunately, the World Bank had earlier projected that Nigeria will get out of recession with a 1 percent growth by the end of 2017.

Thankfully, there are indications to support the continuous growth of the economy. Inflation has been on a reduction eight months straight. Further reduction will allow for increased buying power which will stimulate the Trade and Real Estate sectors. It seems the government can continue increased oil production by at least keeping Niger Delta militants happy.

Something interesting has also begun to happen. The pressure of the dollar scarcity and consequent job losses compelled the market to go into local production to generate revenue. Agricultural produce and exports have been shooting up.

Information from South African retail giant ShopRite shows that in the midst of weaker purchasing power & devaluation, its Nigerian franchise made an impressive 50 percent revenue growth. These sales were driven by a whopping 80 percent of products locally sourced in Nigeria.

On the other hand, Angola is Shoprite’s largest Non-RSA market. Both Nigeria and Angola have something in common, Oil revenue and currency devaluation, yet did not have the same outcome.

Rennaisance Capital is revising its 2017 GDP growth forecast up to 0.7% vs. 0.5% previously, owing to a more favourable outlook for oil output.

The downside risk to this growth outlook is a resumption in attacks on oil facilities that results in output falling.
Overall, conditions in Nigeria have improved further over the past months and managers are expressing renewed optimism that the economy will continue to grow and regain strength after the recession.

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Nigeria

Nigeria’s economy to experience higher growth if liquidity can be unlocked

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“Unlocking Liquidity will restore growth and stability for Nigeria,” Ayo Teriba, Economist and CEO, Economic Associates.

If Nigeria is to achieve sustainable economic growth and stability in its economy, unlocking liquidity must be given top priority.

Dr. Ayo Teriba, an economist and CEO, Economic Associates, made explained this point at the Q2, 2019 one-day quarterly conference on Nigeria’s economic outlook in Lagos.

He decried the fact that Nigeria was at the low end of the liquidity ladder in Africa, arguing that the situation had to be addressed urgently.

Liquidity he pointed out was critical to increasing the nation’s external reserves that serve as a buffer against shocks in commodity prices.

One of the ways he believed Nigeria could improve its liquidity, is by attracting capital inflows, which was important considering the revenue challenges of the government.

In the evolving race for global liquidity, Teriba made a strong case for the alignment of policies to strengthen liquidity.

According to him, “The Federal Government is focused on growth, while the Central Bank of Nigeria is concerned about stability. There is no express concern about liquidity”.

He was of the view that liquid markets are about making sure that there are buffers against shocks, and for Nigeria, having more capital inflows was important than outflows.

Speaking further Teriba identified the various options for unlocking liquidity in the economy, which include;

Privatization: Which implies partially selling its equity across all State-Owned Enterprises, SOEs to retain a minority stake. (Brownfield Foreign Direct Investment Inflow)

Liberalization: This implies the development of idle land and building and unbundled infrastructure projects. (Greenfield Foreign Direct Investment Inflow).

Commercialization: Getting rental income from wholesale leasing of idle lands and buildings.

Securitization: This suggests securitization of future income streams from all financial and non-financial assets.

Teriba called for a strategic reform of revenue generation in the federation and across all tiers of government.

The economist stressed the need for Nigeria to move beyond exports, taxes and debts towards rental income and equity. He stressed that Nigeria had a lot to gain from securitizing its assets.

Some of the assets he identified for the government to consider are the following;

Corporate Assets: Which are government wholly-owned or majority equity holdings in State-Owned Enterprises, SOEs.

Financial Assets: Which represent the government’s minority equity holdings in Joint Ventures and other companies

Tangible Non-Financial Assets: Taking the steps of commercializing and securitizing idle lands and buildings, amongst other assets.

Giving further insight on capital flows, he identified foreign direct investment, FDI and Remittances as the major types that Nigeria should utilize.

He gave an example of Saudi Arabia that has developed a privatization plan worth $ 100bn, which will bolster the liquidity of the Gulf nation.

Dr. Teriba also referenced the Liberalization and Privatization plans of India, that has positioned the densely populated nation, as one of the leaders in FDI.

The CEO of Economic Associates was of the strong view that Nigeria needs a robust strategy to attract more foreign investments to compensate for lost export revenues.

In an interactive session with participants, he called on Nigeria to explore how it can leverage the Diaspora remittances, noting Africa was one region that had a challenging environment for remittances. Currently has a foreign reserve of approximately $45bn which can triple within a year, if it prioritizes unlocking liquidity through the various capital inflow options available.

Coming into 2019, considering various views on FX stability and expected calmness in the polity post-election had revealed an improvement in economic growth over the year. Notably, growth was projected to be anchored on stronger performance in the non-oil sector as the lower investment in the oil sector– save for the addition of the Egina oil field – amidst shut-ins at key oil exporting pipelines will result in slower growth in the oil sector and by extension a much slower contribution to overall GDP. Notwithstanding, the optimism of stronger contribution from the non-oil sector, has boosted the impact of the innovative programmes by key industry players in the ICT on the overall subsector growth. Reflecting the improved activity in the ICT subsector in Q1 19, coupled with recovery in both the Agriculture and manufacturing sectors, economists expect a much robust growth in GDP over 2019 by 20bps to 2.2% YoY (FY 18: 1.9% YoY).

Starting with the harbinger of growth, some economists retain their surmise on most sub-sectors in the nonoil territory with slight changes to services – driving a nonoil sector growth of 1.8% YoY (FY 18: 2.1% YoY). While some made an upward adjustment to the growth assumption for ICT subsector, the high base of growth in the prior year, the lull in the real estate and slower growth of credit creation in financial services is expected to constrain the rate of growth for the overall services sub-sector. In the ICT subsector, the upward projection to the assumption emanated largely from the now telling impact of the innovative customer acquisition programs. For financial services, notwithstanding the recent policies aimed at enhancing private sector lending – there are not much traction, as banks remain cautious in growing their risk assets. Lastly, there’s a believe that activities in real estate sector would remain muted given its oversupplied state. That said, activities in services is expected to expand modestly by 1.7% YoY (FY 18: 3% YoY).

On Agriculture, there is an optimistic view of a recovery in crop production due to favorable weather and government intervention aimed at curbing ongoing conflict in the northern region. On the government intervention, the RUGA (rural grazing area) settlement program was recently proposed, which requires each state to provide lands for the herders to grow their cattle. Though the program was suspended due to kickbacks from various states, there are positivity on some form of concession by the State government given the critical nature of the sector. Further buttressing the point is the ongoing discussions on a peace pact between the Zamfara state government and armed bandits in a bid to improve farming activities in the state. That said, economists expect the sector to grow by 3.2% YoY (FY 18: 2.3% YoY).  Elsewhere, while the general elections slowed activities in the manufacturing sector, some economic pundits see some traction in the sector beyond Q1 2019. Further upside would be payment of the minimum wage approved at the start of the year and successful implementation of the presidential order to clear the Apapa gridlock which had been a strain on producers over the last two years due to difficulty in transporting raw materials. That said the manufacturing sector is expected to grow by 2.13% YoY.

In the oil sector, it was highlighted at the start of the year that the plausible risk to crude oil production would be the resumption of militant attacks during the first quarter of 2019 should the electoral process get violent. With militant attacks out of sight, there is no impending risk to overall production asides minor pipeline leakages. Asides that, additional 200,000bpd capacity from Egina oilfield which resumed operations in January further supports the stance of increased production. For context, while NNPC is yet to provide any data on Nigeria’s oil production this year, the channel checks with external sources reveals that actual production touched 2mbpd (condensates inclusive) in April. That said, it is expected average oil production to print at 2.04mbpd – 6.4% higher than the prior year. Thus some economists suggest that the Nigerian economy will experience a 2019 growth estimate of 2.2% as against an initial prediction of 2% as a result of improvement in both the oil and non-oil sector.

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