Saturday, August 20, 2016 05.45PM / Jayaike Ukoha-Kalu, Research
Q2 GDP and Concerns
Q2 economic metrics have been delayed a further 13 days in Nigeria, mainly because the Statistician General’s five year term will have come to an end by mid August. The Emerging Markets space and Nigeria in particular has had a tempest of a half year in 2016. With the persistent macroeconomic shocks that occurred from Q4’15 through Q1’16 continuing into Q2’16, Nigeria has seen her economy barely survive and slip into a recession.
The 2016 policy discussions and debates have revolved round the foreign exchange (FX) situation in Nigeria. The past seven weeks in Nigeria’s economic space have been eventful. June 2016 saw the Central Bank of Nigeria make stumbled efforts to float the Naira and July 2016 brought with it the maturity of the first Naira Settled futures contact, offered by the CBN and executed on the FMDQ- a few milestones for Nigeria’s FX market.
Nigerians have been holding their breath since the recent IMF GDP forecasts for Nigeria, and in less than two weeks, Nigerians will know whether the country is truly on course for a long harsh recession. August 31, 2016 is results day and the NBS regardless of who heads the agency will release Q2 GDP and Headline Inflation numbers. The outlook for both is already negative with several forecasts predicting inflation to hit between 17.4 and 17.2. Thanks to the good work going on at the NBS, we can be certain that whatever these numbers are, they will be an accurate measure of the current macro health in Nigeria.
Understanding the MPC’s Decision
At the end of July, the CBN’s Monetary Policy Committee sat customarily and defied all analysts’ predictions, by deciding to tighten monetary policy. The MPC hiked the MPR, raising the base rate by an unprecedented two hundred (200) basis points, from 12% to 14%; choosing to fight negative real interest rates. With the apex bank opting for price stability instead of growth, this was a particularly difficult decision for the committee.
In it’s communiqué for the meeting, the MPC directly recognized that the “conditions undermining domestic output growth were outside the direct purview of monetary policy.” The MPC in fact went further to make a case for restarting the economy and pushing for growth, noting that the current inflationary pressures in Nigeria are largely structural. It had hoped for fiscal policy via stimulus to help with the current situation but such help did not materialize on time.
The rationale behind this hike was based on the premise that inflation in Nigeria was seriously eroding the purchasing power of fixed income earners. The inflationary pressures had also invariably caused negative real interest rates to occur in the economy, and this situation had been deterring the foreign investment and investors that the country so desperately needs.
This decision although understandable is quite puzzling, as the MPR in a ten year period seemed not to have substantial influence on the inflation rate in the country. As a matter of fact, for almost four years between July 2008 and January 2012, inflation in Nigeria had remained well above the monetary policy rate. The spot price of the Bonny Light on the other hand seems to wield more influence over inflation in Nigeria than the MPR.
This is evident in chart 2 (see below). During the 2009 – 2010 periods when the commodity fell over 50% to average at $60, Nigeria saw one of its worst periods of Inflation, and similarly in the past two years, the crash in oil prices has induced another round of increased inflation. It is clear just how exposed the country is to oil.
Nigeria’s Q2/Half year results (Inflation, GDP, Unemployment)) are crucial mainly because they will form the basis for what will be the first test of the CBN’s decision to fight inflation and ensure price stability.
In more ideal environments, when inflation moves, the base rate can be used as a policy tool to manage it. By going up, down or at least remaining within reasonable margins, unfortunately the way the macroeconomic complexities happen in Nigeria, this might not be the case; the usually textbook or preferred solution is not always the most practical. It is noteworthy to know that around the world, the Central banking sentiment in the past quarter concerning inflationary pressures and base rates has been to drop these rates or at least keep a holding pattern.
Citing Kazakhstan as an example, Central Asia’s largest energy producer has shrunk zero point two (0.2) percent in the first five months of 2016, similar to Nigeria in it’s dependence on oil, the commodity accounts for more than 60% of the country’s exports, it had in the previous year abandoned a currency peg and floated it’s currency (the Tenge), the currency recorded as much as a 50% loss in value against the dollar, much like what the Naira is doing and will do over the next couple of months. Kazakhstan’s economy performed similarly to Nigeria’s late last year and in the early parts 2016. The key difference with both countries though has been in the reaction time and focus of their central banking systems.
The National Bank of Kazakhstan unlike Nigeria’s CBN in its handling of the FX situation, loosened controls much earlier, in reaction to China’s devaluation and oil at $30-$40, looking towards only one component of the macroeconomic trillema it faced, Inflation. The Central Bank of Nigeria had spent the better part of 2016 considering what to do with the exchange rate, while inflation crept up. The National Bank of Kazakhstan on Monday (15-Aug-2016) kept the base rates unchanged, even as headline inflation peaked at 17%, mainly because it had seen the Tenge rally 14% against the Dollar, confident that it’s past actions would be enough to push inflation down to 8% by the end of 2016. Kazakhstan is certainly not Nigeria but it’s an example of how the central banking system of a country can manage the macro situation of the country with focus and reasonable reaction timing.
To move forward with Nigeria’s slowing situation; first, the country has to realize that in the short term, it cannot close all the evident structural gaps that exist; closing these gaps will require a series of consistent, concerted efforts over an extended period of time. In this regard, the tone of the Federal government has been a little encouraging but it’s still too early to tell whether there’s substance to a lot of the talk. Solutions have never been part of the problems of the country and this is evident with the Seven Point Agenda or The Transformation Agenda.
Nigeria also has to consciously decide to adjust to life with oil bouncing between $40 - $50 and any other shocks that come with the global energy market, because this might certainly be the new normal for quite a period, third and finally, the country needs to take steps to make sure it doesn’t remain exposed to the damage that such steep shocks in export-income can cause. Diversification has become a household word in the country but in reality not much to this regard is really gaining traction, mainly because at best it is wishful thinking in the short term; proper infrastructure has to be long standing before any such diversification can materialize.
A quicker alternative to the promotion of export rhetoric would be foreign direct or foreign portfolio investments. As outlined in his brilliant paper “This Time is Different: There is a Clear Way Forward for the Nigerian Economy” July 2016, Dr. Ayo Teriba makes a case for foreign direct investment and how to go about it in these trying times.
He likens this current situation to the crisis of the early eighties where the first export income collapse occurred, stating further that this time is different, outlining the alternative investment opportunities for Nigeria as clear ways out. Unlike in 1982, the world today is awash with liquidity and investors who are ready and willing to engage emerging markets like Nigeria. FDI inflows into the country over the past five years have fallen dramatically while outflows from the country steadily increases. This trend is set to continue by the time figures are available at the end of 2016, more practical steps need to be taken to stem the slowing process of Nigeria’s economy. The third quarter of Nigeria’s economic calendar has begun and by now the case for urgency cannot be emphasized enough.
1. Revisiting CBN's Monetary Policy Approach - Proshare
2. Resolving the Exchange Rate Regime Conundrum
3. CPI, GDP data from The Nigerian Bureau of Statistics
4. IMF world economic outlook, July 19th 2016 [Accessed on 19/07/2016]