Country Note | Nigeria – Exiting recession

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc.)

Economy likely out of recession in Q1
Growth was -1.5 percent in 2016, same as our forecast.[1] More importantly, it vindicates our view that the economy would not linger in recession for too long.[2] Our reckoning is that the economy would show positive growth in the first quarter of 2017. The assumption behind this discountenances any stimulation efforts by the government. Considering the negative turn that led to the recession was policy-induced, the lower base for the same period last year suggests a ‘normal’ outcome should push the growth headline into positive territory in Q1. Our forecast may turn out to be conservative, we reckon: if the extraordinary measures aimed at boosting agricultural and industrial production are considered, it is not farfetched to expect an even more positive surprise. Yes, just like last year, there has been another budgetary holdup. As the 2016 budget would run long enough till this year’s is passed (as far as June if need be), which could be any moment now, the delay has not proved to be similarly devastating. Base effects aside, there are other considerations. Crude oil production suffered for the most part of 2016 due to resurgent militant attacks by resource control agitators in the oil-producing areas. Scarcity of all sorts were also the rage; at first due to foreign exchange scarcity, which then caused fuel shortages as importers could not find enough hard currency, and subsequently, food as well; which apart from paucity of FX for staples like rice and so on was also due to bans imposed by the customs and monetary authorities. And there was a stubbornly resilient insurgency in the northeastern part of the country.

The Buhari administration, which though floundered initially on the economy, has been quite successful in quelling the terrorist menace. Joint operations with Cameroon and Niger have been particularly effective. And the government has since reversed its position on stopping amnesty payments to repentant Niger Delta militants, with the budget for the programme almost tripled in early May. Additional overtures since then suggest the peace may be sustained, boosting oil production. Incidentally, crude oil prices which earlier rebounded, after production cuts were agreed by OPEC members in November 2016, have been volatile lately; below $50. Even with recent output cuts extension commentary by Saudi officials, prices have not been responsive. Our view is that crude oil prices would likely return back to above $50, when the extension of the November cuts is officially announced later this month. Also, the government now has a strategy document, the economic recovery and growth plan (ERGP), released after a 3-month delay. The usefulness as we see it, is that there would now be less bickering over what the government should do. With just two years before elections in 2019, and politicking already in high gear, how much of the plan gets to be implemented remains to be seen.

Nigeria Macro Forecasts 2017 2018 2019
Real GDP, % change 3.0 3.1 4.3
Inflation, % change 14.0 7.0 5.0
Current Account Balance (% GDP) -1.0 -2.0 -1.5
Fiscal Balance (% GDP) -4.5 -4.1 -4.0
USD:NGN* 317 313 300
Source: Macroafricaintel Research, *year-end

Rates may stay pat for remainder of 2017
Renewed efforts at collaboration between the monetary and fiscal authorities are encouraging; insofar as undue pressure is not put on the Central Bank of Nigeria (CBN) to cut rates. Finance minister Kemi Adeosun’s desire for monetary policy easing has been bolstered by the slowing of annual consumer inflation in March to 17.3 percent from 18.7 percent in January; albeit the monthly pace actually accelerated by 1.7 percent in March, almost double that in January of 1 percent. Still, we expect inflation to slow further in coming months, probably ending the year at about 11 percent. Consequently, we do not see how the CBN would be able to justify a rate cut. So even as the CBN would likely face continued pressure from the finance ministry, it would be unwise for any easing move to be contemplated until there is a sustained easing in price pressures. Still, there is good reason to be optimistic. Not only has there been a recent appreciation of the naira as the CBN’s FX reserves level rises owing to recent above-$50 oil, a surfeit of dollars in domicilliary accounts is likely to hit the market soon as erstwhile speculators give up on a hitherto expected naira devaluation. In this regard, the CBN has expressed a determination to support the naira, selling about $6 billion thus far this year (April). With exchange rate pressure on consumer good prices diminishing and local production ramping up, the inflation outlook looks promising. Even so, global factors may be constraining. The Fed is decidedly on a tightening course. The Bank of England and European Central Bank may not be far behind as inflation is already above the 2 percent target in the former and almost so in the latter.

ERGP sets stage for borrowings
Authorities successfully issued a $1 billion Eurobond in February, recording almost 8 times oversubscription. Encouraged by the outing, they plan an additional $500 million, likely before end-Q2. And with the ERGP already in implementation mode, the World Bank would likely avail the government credit request of about $1-2 billion. The African Development Bank would also likely release the second tranche of its $1 billion loan. As Nigerian authorities have already provided their funding commitment on the $11 billion Lagos-Calabar coastal railway project, Chinese authorities are expected to do same when negotiations are completed in June. These would all boost the economy most definitely. But then there is the issue of debt sustainability. Although the country’s debt level is below a quarter of its GDP, without restraint, it could easily rise significantly. Besides, the government’s tax revenue is already overburdened by debt servicing, almost 70 percent according to the IMF. Also, the risk that borrowed funds may not be optimally utilized remains a significant risk. Because even as President Muhammadu Buhari’s anti-corruption credentials are exceptional, a wasteful and corrupt public sector culture remains.

Buhari’s health is a key political risk
Mr Buhari recently returned to the United Kingdom for medical treatment. Concerns have been raised about whether he would be able to complete the remainder of his 4-year term. In his stead, vice-president Yemi Osinbajo has proved to be a pair of steady hands. Fortunately, Mr Buhari has provided him all the necessary support to successfully act on his behalf. Still, highwire politicking by mostly northern state governors over a potential vice-president vacancy in the event that Mr Buhari is not able to finish his term is already about. Without proper handling, this could be potentially destabilising. As Mr Osinbajo has proved to be not interested in contesting the presidency in 2019, his expected impartiality should be mitigating to some extent.

Nigeria Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 14.0 14.0 14.0 14.0
Source: Macroafricaintel Research



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