Markets Await Clearer Economic Policies; Global Economy Faces Significant Downside Risks


Friday, April 8, 2016 5:33PM / FSDH Research

Executive Summary

The major highlights of the Monthly Economic and Financial Market Outlook report are:

·         The global economy faces significant downside risks

·         We expect the implementation of the 2016 Budget to commence. This may increase government borrowing


·         We expect an adjustment in the current exchange rate policy


·         We maintain our foreign exchange rate forecast range of US$1/N230-US$1/N240


·         We expect the inflation rate to increase to 11.76% in March 2016


·         We expect the yields on the fixed income securities to increase in the month of April 2016


·         We expect strategic long term investors to take position in the stocks that have strong fundamentals.


Global Developments

The prices of government bonds appreciated in more countries in March 2016 than they depreciated. The Turkey Government Bond recorded the highest month-on-month price increase of 4.41% to 95.30 in March 2016.

This was followed by the 7.60% April 2021 Russia Government Bond with an increase of 2.25% to 94.63. The 17% April 2022 Egypt Government Bond recorded the highest month-on-month price decrease of 0.18% to 110.23.

The Argentina Bond closed the month at negative real yield. Other bonds we monitored closed the month at positive real yields. The Kenya Government Bond still offers the most attractive real yield amongst the selected bonds in March 2016.

According to the Bureau of Economic Analysis (BEA) of the United States (U.S.), the U.S. economy grew by 1.4% in Q4 2016, higher than the second estimate of 1% previously released. Consumer spending increased more than anticipated and the negative impact from trade came lower than expected.

The unemployment rate in the U.S. increased to 5% in March 2016, from 4.9% in February 2016. The U.S. Federal Reserve Bank (The Fed) maintained its Federal Funds Rate (FFR) at 0.25%-0.50% at its March 2016 meeting. The Fed stated that it intends to proceed cautiously in adjusting interest rates due to the uncertain growth, inflation outlook and markets turbulence.

The Global GDP

The Organization of the Petroleum Exporting Countries (OPEC) noted that the global economy is still recording a weak recovery. The OPEC Oil Market Report for March 2016 revised downward the 2016 global growth forecast to 3.1% from 3.2% in the previous assessment. This is slightly higher than its estimated growth of 2.9% in 2015.

The report stated that the United States (U.S.) is better positioned to weather the global economic challenges. OPEC lowered the growth forecasts for both Japan and the Euro-zone. India and China continue to expand at a considerable rate. However, in China some areas of the economy are affected by the global economic slowdown, particularly exports.

OPEC indicated that the risk to global economic growth remains skewed towards the downside. Many country-specific economic challenges remain and geopolitical issues and their potential to spill over into the real economy may add to this risk. The upside potential of the current global GDP growth forecast is limited, but could come from the U.S., India and the Euro-zone. Also, central bank policies will continue to constitute an influential factor amid lower global inflation.

Unemployment Rate

According to the National Bureau of Statistics (NBS), the unemployment rate in Nigeria stood at 10.40% as at Q4 2015 from 9.9% and 8.2% in Q3 2015 and Q2 2015 respectively. The underemployment rate increased to 18.7% (13.42mn) in Q4 2015, from 17.4% (13.2mn) and 18.3% (13.5mn) in Q3 and Q2 2015. The NBS noted that there were a total of 22.45mn people between ages 15-64 who were either unemployed or underemployed in the labour force in Q4 2015. The figure stood at 20.7mn and 19.6mn in Q3 2015 and Q2 2015 respectively.

The report showed that the economically active population or working age population (persons within ages 15-64) increased from 104.3million in Q3 2015 to 105.2million in Q4 2015. In Q4 2015, the labour force population (i.e those within the working age population willing, able and actively looking for work) increased to 76.96million from 75.94million in Q3 2015, representing an increase in the labour force by 1.34%.

This means 1.02mn economically active persons within ages 15-64 entered the labour force in Q4 2015. This increase was the highest quarterly increase in 2015. Within the same period, the total number of people in full employment (who did anytime type of work for at least 40hours) decreased by 1.29% (710,693).

The NBS is of the view that, with an economically active or working age population of 105.02mn and labour force population of 76.9mn, this means 28.1mn persons within the economically active or working age population decided not to work for various reasons in Q4 2015. This is a reflection of the weak economic activities in the country at the moment. It may also affect the GDP growth rate in the short term.

Labour Productivity in Nigeria
The labour productivity in Nigeria rose by 52.5% to N718 in 2015 from N472 in 2011. It also increased by 12.2% between 2014 and 2015.

Q4 2015 was the first quarter in the period under review to experience a drop in Labour Productivity. The decline in labour productivity in Q4 could be attributed to several factors, such as the prevalent petrol shortage, low investment and government spending, and the decline in power generation.

A combination of these factors contributed to the lower utilisation of available labour capacity during the quarter. Quarter-on-quarter, the number of working hours and nominal GDP increased by 15.9% and 6.6% respectively in Q4 2015, compared with Q3 2015.

In Q3 2015, there was a 1.2% increase in working hours with a 6.4% increase in nominal GDP, compared with Q2 2015. While there was a quarterly decline in labour productivity, there was a 12.3% (year-on-year) increase. This is the second highest year-on-year increase in labour productivity over the last five years.

Foreign Trade

The latest foreign trade statistics released by the National Bureau of Statistics (NBS) shows that the Nigerian economy achieved a trade surplus of N3.03bn in its merchandise trade in 2015. The exports dominated the total trade in 2015. In 2015, Nigeria’s total trade stood at N16.43trn, a decrease of 30.60% from N23.68trn recorded in 2014.

This was because of the sharp fall in the value of exports from N16.30trn in 2014 to N9.73trn in 2015. On the average, exports accounted for about 64.87% of the total trade in the last twelve quarters.

The highest contribution of exports to total trade was 72.10% in Q3 2014, while the lowest contribution was 56.80% in Q4 2015. On a quarterly basis, the contribution of exports to total merchandise trade decreased to 56.80% in Q4 2015 from 58% in Q3 2015.

Meanwhile, in the last twelve quarters between Q1 2013 and Q4 2015, oil exports dominated the total merchandise trade at an average of 76.16%.The total trade as at Q4 2015 stood at N3.66trn, down 8.96% from N4.02trn in Q3 2015, and down 26.21% from N4.96trn in Q2 2015.

The top destination for Nigeria’s exports showed that India remained the preferred spot, followed by Spain, Netherlands, France and Brazil. On the other hand, China remained Nigeria’s number one import partner, followed by the United States and Belgium.

Top on the list of the imported goods in 2015 are: Boilers, Machinery and Appliances Thereof; Mineral Products; Vehicles, Aircrafts and Products Thereof; Products of the Chemical and Allied Industries; and Base Metals and Articles Thereof.

The top on the list of the imported goods in the sub-categories in Q1 2015 are: Motor Spirit (ordinary); Other Wheat and Meslin; Imported motorcycles and cycles; Other Machine Tools for Working Stone, Ceramic and concrete; Cane Sugar; and Steel Structures and Parts Thereof.

The leading export commodities are: Mineral Products (88.10%); Vehicles, Aircraft and Parts Thereof; Products of Chemical and Allied Industries (7.0%) and Prepared Foodstuffs, Beverages, Spirits and Vinegar, Tobacco (1.70%).

IMF 2016 Article IV Consultation with Nigeria
The Executive Board of the International Monetary Fund (IMF) stated in March 2015 that the Nigerian economy is facing substantial challenges which require structural reforms to enhance competitiveness and support investment.

The report stated that the recovery in economic activity in Nigeria is likely to be modest over the medium term, but with significant downside risks. The IMF expects economic growth rate in Nigeria at 2.3% in 2016. The non-oil sector growth is projected to slow from 3.6% in 2015 to 3.1% in 2016 before recovering to 3.5% in 2017. The recovery in 2017 is based on the results of policies under implementation, particularly in the oil sector, as well as an improvement in the terms of trade.

The IMF Board opined the need for significant macroeconomic adjustments in the Nigerian economy given the uncertain global outlook and the likelihood of oil prices remaining low. The IMF added that there is critical need to increase non-oil revenues to ensure fiscal sustainability while maintaining infrastructure and social spending.

The report recommended a gradual increase in the VAT rate, further improvements in revenue administration, and a broadening of the tax base. There was also encouragement for the implementation of an independent price-setting mechanism to address petroleum subsidies, while strengthening the social safety net.

The IMF said it is concerned with the CBN’s commitment to its inflation objective. It stated that the CBN’s monetary policy and foreign exchange policy had adversely impacted economic activity. It underscored the need for credible adjustment to the large terms-of-trade shock (ratio of export prices to import prices), including through greater exchange rate flexibility and speedy unwinding of foreign exchange restrictions.

This is to facilitate an exchange rate consistent with economic fundamentals. The fund however, welcomed the recent monetary policy tightening and recommended that the central bank target price stability to maintain inflation within the target range.

The IMF Board stressed that Nigeria’s financial sector soundness indicators remain favourable. It however recommends a further strengthening of the regulatory and supervisory frameworks to improve resilience.

According to the Executive Board of the IMF, the key risks to the Nigerian economy outlook include:


·         Lower oil prices

·         Shortfalls in non-oil revenues

·         Further deterioration in finances of State and Local Governments

·         Deepening disruptions in private sector activity due to constraints on access to foreign exchange

·         Resurgence in security concerns.

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