Monday, December 02, 2013 1501hrs / By Dr. Kingsley Chiedu Moghalu
Being a keynote address by Dr. Kingsley Chiedu Moghalu (Deputy Governor Financial System Stability, Central Bank of Nigeria) at the 3rd Annual CBO Capital Investors Conference, Eko Hotel & Suites, Victoria Island, Lagos on Friday, 29th November, 2013 with the Theme: Pre-election Investment Strategies for Nigeria in 2014
The topic “The Outlook for the Nigerian Economy in 2014” is apt and timely particularly for the investing community, as we count down to the next general elections in 2015. To undertake a prognosis and outlook of the economy in 2014, it is helpful to provide a background by briefly reviewing some major economic developments in 2013. Incidentally, the CBN Monetary Policy Committee at its last meeting dwelt on these developments and provided insights on the outlook for 2014.
Global economic growth averaged 2.5 per cent in the first half of 2013, same as in the second half of 2012. The United States (US), Japan and a few European countries just emerging from recession are helping to drive the current growth. Given the changing global growth dynamics, the International Monetary Fund (IMF) revised its global economic growth forecast in October to 2.9 per cent in 2013 and 3.6 per cent in 2014.
The on-going reforms in the various sectors of the Nigerian economy are gradually yielding positive results. This has manifested in the country being classified among the fastest growing economies in the world and a middle income country. Nigeria’s real output growth in the last decade has averaged over 6 per cent. In the second and third quarters of 2013, real output grew by 6.2 and 6.9 per cent, respectively and projected to grow by 7.7 per cent by the end of the fourth quarter2. In addition to the robust growth largely driven by the non-oil sector, the stance of monetary policy has helped to significantly rein in inflationary pressures which moderated to 7.8 per cent in October 2013 from 8.0 per cent in September. The moderation in consumer price inflation reflected a trend which began in the fourth quarter of 2012. The anticipated bumper agricultural output is expected to lead to further decline in inflation and contribute to a sustained macroeconomic stability. However, the threat of a spending blow-out in the run-up to the 2015 elections poses potential risks to inflation.
The external sector has remained viable as the current account recorded surplus in the first-half of 2013. In terms of reserve accretion, there has been improvement as Nigeria’s external reserves rose to US$45.37 billion as at November 15, 2013, representing an increase of $1.26 billion or 2.85 per cent above the level of $44.11 billion at end September 2013. External reserves increased by $0.95 billion or 2.14 per cent on a year-on-year basis over the $44.47 billion at end-November 20123. The accretion to reserves reflects positive developments in the global market, fiscal prudence and foreign exchange management policies such as the wholesale Dutch Auction System (wDAS) and retail Dutch Auction System (rDAS). These, in addition to other policies of the CBN, have stabilized the exchange rate of the domestic currency. The average exchange rate of the naira to the US dollar stabilized at N157.38/US$ in October 2013.
In addition, the conducive investment climate brought about by predictable macroeconomic environment has continued to ensure sustained inflow of foreign capital into the economy. For instance, the aggregate foreign capital inflows stood at US$7.79 billion at the end of second quarter 2013 compared with US$4.53 billion in second quarter, 2012. Of this, the foreign direct investment inflow was US$1.47 billion or 18.9 per cent while portfolio investment inflow accounted for US$6.52 billion or 81.1 per cent.
The financial sector has continued to play a critical role in the development of the economy by mobilizing resources for productive investment.
The capital market continued its rally with the equities market providing the lead. The All-Share Index (ASI) increased by 34.9 per cent from 28,078.81 on December 31, 2012 to 37,883.53 on November 15, 2013. Market Capitalization (MC) increased by 35.0 per cent from N8.97 trillion to N12.12 trillion in the review period. Improved earnings and investor confidence in macroeconomic management and substantial portfolio inflows (as foreign investors took advantage of the favourable domestic economic environment) accounted for the upswing in capital market activities.
The performance of the financial sector was as a result of the continuous implementation of the financial sector reforms that have strengthened the sectors’ financial intermediation process engendered by improved interventions in relevant and critical sectors of the economy, stronger regulation and supervision through better disclosures by financial institutions, improved corporate governance, and capital market development. Other measures include improved cost structure of banks, enhanced financial inclusion, and improving financial infrastructures. There have also been numerous programmes and projects to improve the payments system. The banks in Nigeria are safer and the CBN will, in collaboration with other stakeholders, continue to implement sound financial sector policies and ensure that the recent gains are sustained and consolidated.
While Federal Government spending overall in 2013 has not been significantly higher than in 2012, oil revenues have continued to decline in spite of the relative stability in oil price and output when compared with preceding years. As a result, Excess Crude savings have fallen from about $11.5b at year-end 2012 to less than $5b on November 14. External Reserves have remained in excess of $45billion only because of a massive inflow in portfolio funds. The implication of this is that financial markets are susceptible to external shocks.
Provisional data on gross federally-collected revenue from January to October 2013 stood at N8,291.79 billion, of which oil sector accounted for 69.9 percent and the non-oil sector contributed the balance of 30.1 percent. This represented a decline of 12.3 and 9.4 per cent below the proportionate budget estimate in 2013 and the actual receipts in the corresponding period of 2012, respectively. The projected gross revenue at N11,339.78 billion at end-December 2013 is expected to fall below the budgeted revenue for 2013 and actual revenue in 2012, by 10.1 and 12.0 percent, respectively.
Actual Federal Government retained revenue for January to October 2013 stood at N3,188.15 billion, representing a shortfall of 21.0 percent compared with proportionate budget for 2013. However, the total expenditure of the Federal Government Jan-Oct 2013 stood at N3, 770.26 billion, which was lower by 19.7 percent below the proportionate budget for the same period, but exceeded the cumulative outlay during the same period of 2012 by 2.2 per cent. Given the budgeted expenditure of N5, 792.43 billion and retained revenue of N4,905.36 billion, the fiscal deficit for the year is projected at N887.07 billion or 1.9 percent of GDP. Between January to October 2013, the fiscal operations of the Federal Government resulted in a deficit of N582.11 or 1.5 percent of GDP and financed mainly through domestic borrowing. The major concern of the CBN is its impact on macroeconomic variables. The Bank therefore continued to pursue tight monetary policies in order to contain inflationary pressure. These include the introduction of cash reserve requirement (CRR) of 50 percent on public sector deposits with the deposit money banks (DMBs) to stem liquidity surge.
THE OUTLOOK FOR 2014
Following the economic performance in 2013, the Nigerian economy is expected to grow strongly in 2014 with the growth to be driven by high oil prices and robust domestic demand. In addition, the several reforms initiated and pursued by government and her agencies in 2013 are expected to impact the economy positively in 2014. These include:
I. Government efforts to improve transportation network and port reform to strengthen economic linkages between sectors, cities and regions and make growth more inclusive,
II. The expected passage of the Petroleum Industry Bill (PIB), which is expected to improve local content, ensure technology transfer and job creation;
III. The modernization of agriculture through improved seedling and value chain initiatives which will likely increase agricultural output;
IV. Financial sector reform through financial inclusion which is expected to further enhance economic growth and job creation through access to financial products and services by a large segment of the informal sector of the economy.
V. Power sector reform that will reduce cost of doing business and attract local and foreign investors into the industrial and manufacturing sectors of the economy and open job opportunities. The recent historic hand-over of licenses and certificates to new successor owner companies of the defunct Power Holding Company of Nigeria (PHCN) marked an important milestone in the on-going reform of the power sector. The development is expected to raise Nigeria’s power generation capacity to about 20,000 MW by 2018 and lead to efficient and stable power supply at competitive prices. The provision of stable electricity supply will unleash Nigeria’s enormous economic potentials by creating employment opportunities and boosting industrial growth and development that will have a positive impact on the country’s GDP which currently stands at $262.61 billion.
VI. The licensing of private refineries will boost job creation and stem petroleum product importation and conserve foreign exchange outflow. The recent signing of loan syndication agreement and plan by the Dangote Group to invest $9 billion to build a refinery/petrochemical/fertiliser complex expected to come on stream by 2016, is a game-changing development that has the prospect of stimulating the growth and development of the downstream sector of the petroleum industry with far-reaching implications for Nigeria’s economic growth and transformation. It is expected to lead to a significant reduction in fuel importation, savings in foreign exchange, creation of employment opportunities, industrial growth, boost in agricultural production and diversification of the Nigerian economy, among other potential economic benefits.
In the real sector, it is projected that real output growth will reach 7.3 per cent. On its part, the IMF has projected an output growth of 7.4 percent. The forecast for inflation shows that the rate will remain within the single digit band through to 2014, despite the pre-election spending that might threaten price stability. The full effects of Federal Government and CBN interventions in the real sector such as Power and Airlines Intervention Fund, the Nigeria Incentive – based Risk Sharing System for Agricultural Lending (NIRSAL), the Entrepreneurship Development Centres (EDCs) and other complementary projects of the government will improve the growth prospects in 2014. The conclusion of the privatization of the power sector is expected to have positive impact on output growth and employment generation as activities in the formal and informal sector are expected to pick up.
The developments in the external sector are expected to be favourable as the increase in oil price in the global commodity market are projected to be sustained. This is expected as the performance of the economies of the advanced and emerging economies gradually improve. Consequently, robust external reserves and external debt will remain within the sustainable thresholds. Most importantly, Nigeria will have competitive edge in the international capital market in 2014, owning to robust growth, high reserves level, stable exchange rate and clement investment climate. The interest rate differential between Nigeria and most developed countries will continue to be a source of attraction for global capital flows to Nigeria. The retention of the BB- rating for Nigeria by Fitch and Standard and Poor’s rating agencies is an indication of the conduciveness of the country as an attractive investment destination. Nigeria is also expected to remain a low-risk debtor country which is an indication of its credit worthiness.
In the fiscal space, the outlook in 2014 remains bright, as oil prices are expected to maintain their high levels given the gradual recovery of major oil consumers like the United States and China from the impact of the recent global financial crisis, thereby pushing up crude oil demand. Though the discovery of shale oil in the US may adversely affect Nigeria’s crude oil demand, the impact may not significantly reduce oil demand for now. Thus, the relatively high international price of crude oil which has remained substantially above the budget benchmark price of US$79 per barrel through to the end-periods of 2013 is likely to be sustained in 2014, provided the threats of pipelines vandalism, leakages and oil theft are contained effectively. However, given that 2014 is an election year, government spending is expected to rise due to the financing of election activities which may expectedly worsen the liquidity conditions in the system leading to inflationary pressures.
The outlook for the financial sector in 2014 is bright. With the commitment of the CBN to macroeconomic and financial system stability, Nigeria is likely to evolve as a preferred destination of choice for investment in 2014. In addition, the CBN’s commitment to the pursuit of financial inclusion is expected to broaden the deposit base of deposit money banks (DMBs). Financial system stability will be strengthened in 2014 with sustained macroeconomic stability, and consolidation of the on-going reforms in the financial system. The positive ratings of Nigerian banks by international rating agencies are evidence of their soundness and will continue to enhance the inflow of capital into the banking sector.
The outlook for 2014, however, portends some potential headwinds that may lead to further tightening in monetary conditions. It is expected that 2014 will be the year for QE- tapering in the US and interest rate rises in Europe, both of which will lead to some pressure on the exchange rate and stock prices due to the impact on capital flows. It is also the year in which election spending is likely to take place domestically, thus bringing more pressure to bear from the fiscal side. As a result, there may be need to continue the current monetary tightening mode in response to these eventualities in 2014.
Let me conclude by stating that while the overall economic outlook for 2014 appears mixed, there is need to sustain and consolidate current efforts to address the lingering challenges of insecurity, infrastructural deficits as well as the threats to oil production such as pipeline vandalism, crude oil theft, etc. There is also the need to give greater attention to the diversification of the Nigerian economy away from the current over-dependence on Oil export in order to avoid the vagaries in the international oil market and their attendant adverse effects on the domestic economy.
Thank you for your attention.
1. CBN 2012 Annual Report and Statement of Accounts
2. CBN 2013 Second Quarter Economic Report
3. CBN 2013 Third Quarter Report Economic Report
4. IMF World Economic forecast for Nigeria, Nov. 2013
5. National Bureau of Statistics (2013) Second Quarter Report
6. National Bureau of Statistics (2013) Third Quarter Report
7. Nigeria and the IMF, Oct. (2013)
8. Nigeria and the IMF, Oct.(2013): financial Sector Stability Assessment
9. Communique No.92 of the CBN Monetary Policy Committee Meeting of Monday 18 and Tuesday 19, November, 2013