Nigeria Economy | |
Nigeria Economy | |
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Monday, December 31, 2018 09:44AM / FSDH / Image Credit: pcma
Certain key events, both at the global level and in
Nigeria, will influence economic and business activities in 2019. FSDH Research
examines a few of these events and discusses the implications for businesses
and investments in Nigeria. The expected hike in interest rates in major
advanced countries will lead to an increase in global yields and may put
pressure on currency in Nigeria. There are strong indications that the US
Federal Reserve, Bank of England and European Central Bank will increase
interest rates in 2019. The expected increase in the interest rate in the
international market may also lead to an increase in the interest rate in
Nigeria because of monetary policy adjustments to reduce capital flight.
Nigeria may lose a substantial amount of its projected
crude oil revenue due to a limit on crude oil production and the drop in the
global crude oil price. This may also lead to a drop in the supply of foreign
exchange into Nigeria, resulting in a possible depreciation or devaluation of
the Naira. Nigerian businesses should look for local alternatives, where
possible, for the raw materials needed for their production process. They
should also limit or eliminate foreign debt, particularly if they do not have
foreign exchange receivables to mitigate the possible foreign exchange risk.
FSDH Research also advises that businesses should put in place appropriate
foreign exchange hedging strategies.
The Q3 2018 Balance of Payment (BoP) report that the
Central Bank of Nigeria (CBN) published shows that earnings from crude oil and
gas accounted for 94.4% of total export earnings during the period. The
external trade report that the National Bureau of Statistics (NBS) published
for Q3 2018 shows that crude oil exports accounted for 85% of total exports.
Therefore, any adverse movement in crude oil price or production has high
negative implications on the Nigerian economy.
Although FSDH Research expects the general election in
2019 to be peaceful, its outcome will determine economic activity and business
in Nigeria. A peaceful election will ensure stability of the Nigerian economy
and pave the way for the flow of investments, both Foreign Direct Investments
(FDIs) and Foreign Portfolio Investments (FPIs) into Nigeria. Certain long-term
business and investment decisions may be taken immediately after the election
if the current government retains power. However, if there is a change in
power, investors may wait until after the presidential inauguration on May 29
before they take long-term investment decisions, to give them enough time to
access details of the policies of the incoming government.
There are certain macroeconomic realities that the
Nigerian government must contend with in 2019. FSDH Research believes the
fiscal deficit in 2019 may be higher than in 2018, and higher than what is
projected for the year 2019. In order to execute certain plans that will move
the economy forward, government may have to increase borrowing or partner with
private sector operators on key projects. An increase in borrowing will increase
the interest rate, while partnership with the private sector will expand
economic activity and create new job opportunities.
Already, the ratio of government’s debt service to
revenue is high and at an unsustainable level. Therefore, additional debt, in
an environment of rising interest rates, may reduce government’s ability to
execute critical programmes that will improve the business environment. While
fixed income investors may enjoy higher yields in 2019 than in 2018, businesses
may suffer under rising interest costs. FSDH Research analysis shows that
electricity and the pump price of Premium Motor Spirit (PMS) are two key prices
that government will need to adjust in 2019 to free up funds for developmental
purposes. The adjustment may increase the inflation rate in the short-term, but
it will benefit the economy in the long-term. More investments are required in
the power sector than are currently available.
However, the sector may not attract investment in the absence of a cost-reflective tariff. Government already allows an off-grid power supply arrangement based on ‘willing buyer, willing seller’. The tariff at which this arrangement is settled is higher than the tariff for the power from on-grid supply. Appropriate policy responses from government and strategies from the business community may ameliorate the likely negative impacts of these key events in 2019.
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