As the nation prepares for the next election come 2015, there are fears that the economy may be the worst for it judging by the unimpressive performance of businesses in different sectors thus far, reports Ibrahim Apekhade Yusuf
Less than three months to February 2015, when Nigeria is expected to elect new representatives to respective public offices including presidency national assembly and governorships, the fears out there is that in the runoff to the election proper the telltale signs on the economic landscape is terribly scary.
The timetable for the general elections as released by the Independent National Electoral Commission (INEC) indicates that both the Presidential and National Assembly elections are expected to hold on February 14, 2015, while that of the governorship and State Assembly elections holds February 28, 2015.
For economic pundits who have monitored the way things are going, their verdict outright is that the economy is currently on a tailspin.
Year of uncertainty
Ahead of 2015, some market jitters have now reappeared, with severe implications for the economy. Wale Amoo, an economic analyst captures the scenario perfectly while attempting a prognosis of the clear and present danger signs for the economy.
“As preparations for the 2015 elections reach fever pitch, the unfolding events have implications for Nigeria and businesses operating in the country. There is a threat to government revenue that is heavily reliant on oil, a revenue stream that is now under threat from declining oil prices (now below $90 per barrel), and an outlook suggesting even softer prices in 2015. The fiscal buffers are also currently low, with the 30-day moving average of the reserves at $39bn, and the actual liquid reserves at about $36bn. If we take account of the ‘rented’ funds portion of the reserves, then the figure is even lower,” Amoo said while offering plausible explanation.
Besides, he said, the Bank of International Settlements (BIS) estimates that about $1.4 trillion of the liquidity created during the highly accommodative monetary policy in major advanced economies are invested in emerging and frontier markets’ assets.
“There are, however, indications that global liquidity will be tighter in 2015, which suggests possible reallocation of resources by asset managers and likely repatriation of some of the foreign funds. The decision of foreign asset managers to buy or sell has an impact on small and illiquid markets like Nigeria, a country that has become dependent on the foreign capital flows as a major source of foreign exchange in recent years. All these suggest tough decisions will need to be made by both the fiscal and monetary authorities in the coming year in order to maintain a stable macroeconomic environment.
“Domestic businesses will face a number of risks triggered by the fallout from both the global and domestic environments, and there will be many dimensions to these risks, depending on the nature and level of each organisation’s exposure. One of the key emerging risks is the foreign exchange risk. With the outlook for 2015 suggesting a much weaker naira, corporates need to devise foreign exchange management strategies that mitigate their exposure. In recognition of the risk posed by foreign exchange fluctuations, and increasing foreign exchange exposure by Nigerian banks, the CBN just released a circular limiting banks’ foreign currency borrowings and deployment of such borrowings.”
Amoo further noted that the banking sector will be one of the hardest-hit if the exchange rate risk crystalises as many of them have already deployed tier-2 capital into foreign currency-denominated projects based on limited knowledge of the dynamics of the projects and assumptions that are no longer realistic.
Like Amoo, Mr. Stevenson Atama, a stockbroker has argued that as politicians continue to strategise ahead of the 2015 elections, the nation’s macroeconomic stability is becoming way too fragile.
Damning report
A report by CSL Stockbrokers Limited, a division of First City Monument Bank (FCMB), United Kingdom, tagged ‘Nigeria Year Ahead 2014’, has further indicated that the nation’s ecosystem is in turmoil.
The report expressed concern that as the election time inches close, businesses have continued to be at the receiving end.
According to the report, a year ago, it was clear to most investors that risk factors in Nigeria had fallen, that general macroeconomic stability was improving, and that the flagship reforms like power sector privatisation were gaining traction. In fact, it pointed out that the foundation for a good 2014 had been laid by last year.
“At the beginning of 2014, it is difficult to argue that the outlook is so bright. Macroeconomic stability feels more fragile; elections are coming, meaning that key reforms will likely be on hold; and the investment community that so willingly piled in at the beginning of 2013 can no longer be sold the idea that the market is ‘cheap”, the report said.
Commenting on the possibility of a boost in public spending before elections, the report argued that government resources are actually much more constrained than most observers perceive.
Having almost depleted the Excess Crude Account (ECA) in 2013, the report noted that the federal government and states would be faced with the option of a sharp increase in domestic and international borrowing (with a breach of the Fiscal Responsibility Act) or a reduction in spending.
“Ultimately, we think the latter will prove more palatable,” the report added.
But from a fundamental perspective, the report argued that that reported growth rates in the country were likely to remain strong this year, adding that but with each passing year, the proposed GDP re-basing becomes more important.
“Not only will this (GDP rebasing) give investors a better view of market’s size and composition, but it should lead to a deeper understanding of the drivers of GDP growth. “One continuing area of concern is the strength of consumer demand, which has not recovered to the levels seen in 2010 and 2011, and is unlikely to do so this year,” it added.
Furthermore, it stated that 2015 had the potential to deliver an oil price collapse, which would produce an unexpected global economic stimulus but also some unpleasant geopolitical consequences.
“Consensus estimates suggest a 1.1mbpd increase in global oil demand. However, non-OPEC oil supply is forecast to increase by 1.5mbpd in 2014.
“It is theoretically possible that higher production from Iran (relaxed sanctions), Iraq (steady improvements), Libya (recovery from very low levels) and Nigeria (less theft and vandalism) could add a further 2mmb/d to oil supply during second half 2015.
“A scenario of weak demand growth and excess supply is nothing new. In previous years the oil price had been supported by various supply disruptions both inside and outside OPEC and it may be that 2014 is no different to 2012 and 2013,” it added.
Foreign direct investment is also a problem as the outlook looks not very promising. Unlike South Africa, which has recorded more than $10.3 billion in FDI in the last few years, other African countries like Nigeria and Ghana have recorded steep decline in FDI.
Sub-Saharan Africa’s robust economic growth, which the IMF expects to increase to 6.1 per cent in 2014, from 5.1 per cent, last year, has made it an attractive destination for investors.
South Africa’s performance has lagged the rest of the region, however, with the IMF forecasting growth of 2.8 per cent in the continent’s biggest economy this year, an increase from 1.8 per cent in 2013.
In the area of electricity generation, available records from the National Control Centre and the Transmission Company of Nigeria showed that 2,993.7MW was the quantum of electricity that the system was losing due largely to gas shortage.
Since the handover of the Power Holding Company of Nigeria successor companies to new investors, the generation firms have been complaining of a drop in the supply of gas to fire their plants. The development has led to erratic electricity supply across the country with severe implications for the economy.
The outlook in the energy sub-sector is no less disturbing as major oil marketers had warned that the nation’s fuel stock was drying up with non-approval of 2014 first quarter import allocation and government’s N150 billion subsidy indebtedness to them. However, the northern part of the country has been receiving constant refined petroleum products supply from Soraz refinery, in Niger Republics, through the nation’s land border through trucks from the neigbouring country’s facility.
Still little to cheer about
Although the World Bank Group report released last Wednesday said it has become easier to do business in Nigeria; Nigerians, however, argued that it is nothing to cheer about still.
The report, Doing Business 2015: Going Beyond Efficiency noted that Nigeria and other economies across sub-Saharan Africa have focused on making the business environment on the region more conducive, adding that the region was responsible for the highest number of business regulatory reforms globally in 2013/14.
Nigeria put in place 10 reforms to ensure that the private sector is more involved in the country’s economy.
“Sub-Saharan African economies have come a long way in reducing burdensome business regulations,” said Melissa Johns, Advisor, Global Indicators Group, Development Economics, World Bank Group.
According to Johns, the Group’s data show that the region accounts for the largest number of regulatory reforms making it easier to do business in the past year. 75 of the 230 documented reforms worldwide came from sub-Saharan Africa.
Since 2005, all countries in the region, but one (South Sudan), have improved the business regulatory environment for small and medium-size businesses, with Rwanda implementing the most reforms, followed by Mauritius and Sierra Leone, the Group noted.
Nigeria, Africa’s largest economy ranked 38th among the African countries on the ease of doing business list, and 170th globally, moving up five places from last year’s 175th. The report however finds that Nigeria ranks among the top five economies in sub-Saharan Africa in two areas – the ease of getting credit and the strength of minority investor protections.
