January 25, 2012
The IMF has issued a blunt warning that unless the European economic crisis is resolved, the global economy faces another 1930s style ‘Great Depression’ which would negatively affect frontier markets including Nigeria.
This followed the failure of European finance ministers to reach a restructuring agreement with private holders of Greek debt Monday night. If Greece does not put itself in a position to receive aid funding by the end of March, it will suffer a disorderly default on its debt.
“It is about avoiding a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand,” IMF Managing Director Christine Lagarde said in prepared remarks before the German Council of Foreign Affairs in Berlin . “A moment ultimately leading to a downward spiral that could engulf the entire world.” she said.
The IMF wants European countries to act quickly to dramatically boost the size of their debt-crisis firewalls, implement pro-growth policies and further integrate the euro zone.
A drop in global demand would affect Nigeria negatively, as the country depends almost exclusively on oil sales to fund more than 90 per cent of its budget and Foreign Exchange earnings.
If the world economy does go into depression, the price of oil and other commodities would plummet, while the consequences for Nigeria could be disastrous, according to an Emerging Market Analyst with over 30 years experience in the Nigerian oil industry.
“You have to understand that no one will bail out Nigeria , not only because of the way we have wasted our resources in the past, but also because everyone else in the world is having problems today.”
The allusion to wasted resources concerns Nigeria ’s depletion of its Excess Crude Account (ECA) from $20 billion in 2007 to less than $3 billion today. The account, set up as pillar of World Bank reforms, was intended to prevent external shocks of the like warned against by the IMF Boss.
Still continuing on the implications for Nigeria , of a global depression, he stated :”The last time oil prices crashed in 2008 from $142 to less than $40, Nigeria was able to weather the storm due to its twin cushion of ECA and robust external reserves. Today no such cushion exists, buts it’s actually worse since our legislators are totally oblivious to the threat of external shocks with their continued insistence on an expansionary budget and out of control government spending.”
Nigerian legislators recently raised the benchmark budget oil price from $70 to $75 a move that threatens the fiscal retrenchment the finance ministry stated that it intends to pursue.
Any slowdown in the world economy will exacerbate the already fragile domestic economy, in view of mass protests sparked by the withdrawal of fuel subsidies at the start of the year, and the destabilising factor of recent bomb attacks. Amos Odero, head of dealing, Genghis Capital, stated in a recent interview.
“It is actually a big problem. Of course Nigeria’s obvious reliance on FDI will suffer significantly as a result of the worsening security situation in the country, a lot of business people think that it will.”
The street protests and lost output associated with it have been estimated to cost the country N207 billion ($1.3 billion) and will likely have a drag on First Quarter GDP numbers which historically have come in lower than other quarters. Yemi Kale Statistician- General of the National Bureau of Statistics (NBS) stated in a recent interview: “We looked at our projected GDP estimates for the First Quarter, in calculating the cost of the strike, because the contribution to GDP will tend to be a lot smaller in the first quarter.”
A global slowdown may also affect the ability of the Central Bank of Nigeria (CBN) to effectively conduct monetary policy as slowing growth rates and external reserves combine with rising inflation expectations and further currency depreciation, other analysts said.
Heavy intervention by the CBN last year, failed to prevent a drop in the Nigerian naira, as the currency lost 4.46 per cent of its value in 2011, owing to prolonged currency weakness and strong dollar demand that prompted the CBN to move its target midpoint trading band for the naira to N155 from N145, plus or minus three per cent.
The Nigerian naira weakened against the U.S. dollar on the interbank market and at the CBN’s latest bi-weekly auction on Monday, as economic activity gradually resumed in the country after strikes over the withdrawal of fuel subsidies.
The naira closed at N161.30 to the dollar on the interbank market on Monday, higher than Friday’s close of N160.90.
The CBN sold $250 million at N157 to the dollar at its bi-weekly auction on Monday, the same amount it sold at N156.85 at its last auction on Wednesday. It did not disclose the level of demand.
Analysts say withholding information on the level of demand at the CBN’s auction could weigh negatively on the naira and trigger speculative purchases on the interbank market, which together with a global slowdown, may force the CBN to hike rates again or intervene in currency markets, albeit with diminishing firepower of available FX reserves.
Nigeria’s economy, reacting to the last rate hikes, slowed down from 7.7 per cent year on year growth in the second quarter, to 7.4 per cent growth in the third – Further rate hikes would presumably continue that trend.
The CBNs Monetary Policy Committee (MPC) is expected to meet on January 30th, 2012 .December Inflation moderated to 10.3%, but the CBN has hinted that with subsidy removal inflation is expected to rise to 14%.
The Nigerian government budget, expected to increase spending while also continuing subsidies on petrol and stoking more inflation, is yet another pointer towards more rate hikes in an uncertain global economic environment.
Bankole Odusanya, fixed Income expert UBA, in a recent interview commented on the effect of possible pro cyclical Central Bank tightening in a slowing global growth environment.
“The CBN governor himself stated that its very possible that by half year, inflation could hit 14 percent, but using the Monetary Policy Rate (MPR) to tighten the economy might be too drastic. MPR does not just curb inflation themselves, they determine lending rates and other rates in the economy and you don’t want to tighten things too much”
Any MPR rate increase by the Central Bank would also worsen Nigeria ’s already inverted yields curve, a situation when short-term interest rates exceed long-term rates.
Bankole Odusanya, fixed Income expert UBA continues “It’s a very inverse yield curve on the bond, the 2013 maturity yields opened at 16.25 – 16.19 per cent but is expected to close at sub 15 per cent, the longer tenure bonds were bought a lot in the last one yr, with the yield at 14 – 15 per cent, that is lower than short term bonds”