Ways Out of Recession – FSDH

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Thursday, September 15, 2016 10.23am/ FSDH Research

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

The Nigerian economy officially entered into a recession when the National Bureau of Statistics (NBS) released the Q2, 2016 Gross Domestic Product (GDP) figures

Our sectoral analysis of the real GDP shows that the mining and quarrying sector recorded the highest contraction in Q2 2016

The weighted sectoral growth analysis, which relate the sector growth to the sector size shows that mining and quarrying contributed the highest to the contraction in Q2 2016

Looking at the state of the Nigerian economy, we think the following are some low hanging fruits that the government can pluck to turn the economy around in the short-term:


a.      Government at all levels should pay the salaries of their workers - We recommend that government should borrow money to achieve this

 

b.      Increase civil servants access to loans - Government can partner some Nigerian banks or CBN to extend loans to civil servants to boost consumption

 

c.       Partner Foreign Development Financial Institutions and Foreign Real Estate Development Firms – Mortgage loans should be provided to civil servants to buy houses. The government should use the Nigeria Mortgage Refinance Company (NMRC) in conjunction with the Deposit Money Banks (DMBs) and mortgage banks to distribute the loans

 

d.      Partner with Financial Institutions to Use Made-in-Nigeria Goods and Services – This will encourage investments in the textile and fashion industry

 

e.      Concession Major Highway and Railway Lines in Nigeria – The major highways and railways in Nigeria should be concessioned to both local and foreign private sector investors

 

We expect the inflation rate to increase to 17.71% for August 2016, from 17.13% in July 2016

 

We expect the MPC to maintain the rates at the current level when it meets in September 2016.

Global Developments
In the countries we monitored, the prices of government bonds depreciated in more countries in August 2016 than they appreciated. The 17% April 2022 Egypt Government Bond and the 7.75% February 2023 South Africa Bond both recorded the highest month-on-month price decrease of 1.86% to 100.28 and 95.27, respectively. The 7.60% April 2021 Russia Government Bond recorded the highest month-on-month price increase of 1.16% to 97.12.

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

According to the United States (U.S.) Bureau of Economic Analysis, the United States (U.S.) economy grew by 1.1% in Q2 2016, down from 1.2% in the advance estimate. Net trade contribution was lower than anticipated and the fall in inventories was steeper than expected, while consumer spending rose at a faster pace.

Similalrly, the trade gap in the United States declined to US$39.47bn in July 2016 from an upwardly revised US$44.66bn deficit in the previous month and below market expectations of a US$42.7bn shortfall. Imports declined by 0.8%, while exports rose by 1.9%, the highest level since September 2015.



The Global GDP
The Organization of the Petroleum Exporting Countries (OPEC) asserts that there are numerous uncertainties for global economic growth in the second half of 2016 and in 2017. However, its global growth forecast remains unchanged for 2016. The OPEC Oil Market Report for August 2016 maintained its 2016 global growth forecast at 3%, same as in the previous assessment.

The report stated that the Euro-zone, the United Kingdom (UK), China and India are forecast to record lower quarterly growth on average. The sharpest drop in economic activity among these economies is expected for the UK.

The OPEC added that the 2016 growth forecast for the U.S. has been revised down after weak Q2 2016 growth. It also expects that with many uncertainties prevailing, more accurate data in the next month for the US economy will lead to another review of US growth. Japan has been revised up, based on the recent fiscal stimulus announcement.

OPEC indicated that among the most important issues, political developments will play a decisive role across the globe in 2016 and 2017, ranging from important elections in key economies to fiscal policy decisions.



Domestic Real GDP
The Nigerian economy officially entered into a recession when the National Bureau of Statistics (NBS) released the Q2, 2016 Gross Domestic Product (GDP) figures. The real GDP contracted by 2.06% (year-on-year) in Q2 2016, compared with the growth of 2.35% in Q2 2015.

The NBS earlier reported a GDP contraction of 0.36% in Q1 2016, leading to two quarters of GDP contraction (recession). The oil sector recorded a decline of 17.48%, compared with the decline of 6.79% recorded in Q2 2015.

The oil sector contributed approximately 8.26% to the real GDP in Q2 2016, lower than the 10.29% contribution in Q1 2016. The non-oil sector recorded a contraction of 0.38% in Q2 2016, compared with the growth of 3.46% in Q2 2015; and the negative growth of 0.18% in Q1 2016.

The non-oil GDP recorded growth from Agriculture; Information and Communication; Water Supply; Arts Entertainment and Recreation; Professional Scientific and Technical Services; and Education and Other Services. The remaining 19 major sectors, many of which are substantially indirectly dependent on the oil sector recorded negative growth.

The nominal GDP stood at N23.48trn in Q2 2016. This represents a marginal increase of 2.73% from N22.86trn recorded in Q2 2015. In Q2 2016, the services sector contributed 54.80% to the GDP, followed by industries at 22.65% and agriculture at 22.55%.



Ways Out of the Economic Recession
Our sectoral analysis of the real GDP shows that the mining and quarrying sector recorded the highest contraction in Q2 2016. This was on account of the drop in oil prices and the militancy activities in the oil producing region, which disrupted oil production.

This was followed by the finance and electricity sectors. The weighted sectoral growth analysis, which relate the sector growth to the sector size shows that mining and quarrying contributed the highest to the contraction in Q2 2016. This was followed by real estate, finance, manufacturing and construction sectors.

It is interesting to note that these non-oil sectors are related. Thus, the causes of their contraction and the measures needed to stimulate activities in these sectors are similar. The problems in the sectors are highlighted below:

Problems and Issues

·         Weak and declining consumers’ purchasing power on account of delayed payment of salaries

·         Rising unemployment rate due to build-up of inventories and receivables

·         Weak investment expenditure from firms and government

·         Vague economic policy direction

 





Solutions/Steps
Looking at the state of the Nigerian economy, we think the following are some low hanging fruits that the government can pluck to turn the economy around in the short-term. Our recommended strategies are highlighted below:

i. Government at all levels should pay the salaries of their workers -We recommend that government should borrow money to achieve this. This will increase the public debt in the short-term but it will also help to increase spending power, and lower firms’ inventories of finished goods. Consequently, the firms would employ more factors of production and pump money into the economy. In addition, there would be an increase in profits of firms, from which government can realise higher revenue in the form of taxes in the medium-to-long term.

ii. Increase civil servants access to loans -The current purchasing power of civil servants has been depressed with the current rising inflation rate. Government can partner some Nigerian banks or CBN to extend loans to civil servants to boost consumption. Government will guarantee the loans and deduct monthly repayment at source. This will achieve the same result as the strategy 1 above.

iii. Partner Foreign Development Financial Institutions and Foreign Real Estate Development Firms – These financial institutions should be encouraged and attracted to invest in the real estate sector in Nigeria to provide low income housing estates for workers. Government should also involve the local real estate firms in this exercise. The government should also provide lands while it provides funds through the development partners. Mortgage loans should be provided to civil servants to buy houses. The government should use the Nigeria Mortgage Refinance Company (NMRC) in conjunction with the Deposit Money Banks (DMBs) and mortgage banks to distribute the loans. Doing this will mean both the supply side and demand side are adequately taken care of. The strategy will generate activities in the real estate, manufacturing, construction and finance sectors of the Nigerian economy. These sectors are also labour intensive and generate employment opportunities, with the capacity to increase the revenues of both the Federal and State Governments.

iv. Partner with Financial Institutions to Use Made-in-Nigeria Goods and Services - Partnering with Nigeria institutions, both financial and non-financial to use goods and services that have local content; particularly clothes. This will encourage investments in the textile and fashion industry.

v Concession Major Highway and Railway Lines in Nigeria. – The major highways and railways in Nigeria should be concessioned to both local and foreign private sector investors. We have argued that there is a need for the FGN to involve the private sector to develop the transport network. This will create jobs and also attract foreign capital into the sector and other related manufacturing sector of the Nigerian economy.

We believe the above measures with the revolution going on in the agro-allied processing activities, and with partnering with the private sector to improve infrastructure, Nigeria will be out of the recession faster than expected.

Foreign Trade
The Nigerian economy achieved a trade deficit of N196.5bn in its merchandise trade in Q2 2016, an improvement over the trade deficit of N351.3bn recorded in Q1 2016. Q2 2016, Nigeria’s total trade.

The imports dominated the total trade in Q2 2016. In stood at N3.94trn, an increase of 48.89% from N2.65trn recorded in Q1 2016. Exports recorded an increase of 63.26% to N1.87trn in Q2 2016, from N1.15trn in Q1 2016.

On the average, exports accounted for about 61.98% of the total trade in the last fourteen quarters. The highest contribution of exports to total trade was 72.10% in Q3 2014, while the lowest contribution was 43.40% in Q1 2016.

On a quarterly basis, the contribution of exports to total merchandise trade increased marginally to 47.5% in Q2 2016 from 43.4% in Q1 2016. Meanwhile, in the last thirteen quarters between Q1 2013 and Q2 2016, oil exports dominated the total merchandise trade at an average of 75.64%.



Adjusting the exports and imports figures in Q2 2016 for foreign exchange depreciation, the exports figure in Q2 2016 grew over Q1 2016, while imports in Q2 2016 dropped over Q1 2016. Thus the adjusted trade deficit in Q2 2016 dropped lower than the trade deficit in Q1 2016. This may be an indication that Nigerians are adopting the local substitution strategy.



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

Top on the list of the imported goods in Q2 2016 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 Q2 2015 are: Capital Goods and Parts; Industrial Supplies; Transport Equipment and Parts; and Motor Spirit.

The leading export commodities are: Mineral Products (92.7%); Animals and Vegetable Fats and Oils and Cleavage Products (3%); Base Metal and Articles Thereof (1.5%); and Prepared Foodstuffs, Beverages, Spirits and Vinegar (0.9%).



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