Thursday, December 28, 2017 /06:24PM / FDC
2017 was an interesting year for Nigeria. The macroeconomic scorecard showed an overall improvement in most, if not all economic variables. Recovery, albeit slow, from five quarters of negative growth to post a growth rate of 1.41% in Q3’17, is a feat to laud. A review of where the country was at the start of the year to where it is now shows that most indicators are in the green.
To portray this scorecard, we will use the national income (NI) identity, of Y= C + I + G + EX - IM, where
Y = output
C = consumption expenditure
I = investment expenditure
G = government expenditure
EX = exports and
IM = imports.
Economic output increased, thanks to the massive government intervention in the agriculture sector (growth of 3.06%, contribution of 29.15%) and a ramp up in oil production (oil sector growth of 25.89%, contribution of 10.04%). There was minimal disruption to the pipelines and gas supply. This resulted in an increase in Nigeria’s oil output from 1.55mbpd in January to 1.79mbpd (November). These figures are net of condensates.
In 2017, the estimated average supply of on grid power was within the range of 3,500MW- 3,800MW. There were peaks and troughs in the year; some resulted from seasonality, while others resulted from constraints. Productivity is also estimated to have improved, thanks to a reduction in bottlenecks. No data has been released from the National Bureau of Statistics (NBS) on productivity. However, it is expected that positive growth numbers, increased government’s focus on infrastructure and improving the ease of doing business will have a positive impact.
C = Consumption Expenditure
Consumer demand is slowly picking up as confidence levels inch up. Consumers are also gradually adjusting their behavioral patterns, shifting from luxury brands to local substitutes. The disposable income of consumers has picked up in tandem with the declining trend in headline inflation year–on-year and the exchange rate gains and stability recorded in the foreign exchange (forex) market.
Headline inflation at the start of the year was at a record high of 18.72%. Base year effects, seasonalities, decline in global commodity prices and a stable currency all had a positive effect, reducing the
Rate of inflation to 15.9% in November.
For most of the year, the core sub index followed the trend in headline inflation with the food index easing only in late Q3’17. Nonetheless, Nigeria still has a high inflation rate -the 10th highest in Sub- Saharan Africa (SSA). Despite a slower increase of the consumer price basket, domestic commodity prices have remained sticky downwards due to a slow adjustment process and time lag effect.
I = Investment Expenditure
There is a growing sense of investor sentiment in the Nigerian economy. Key policy reforms that were put in place, in addition to positive macroeconomic data, were some of the driving factors. The introduction of the investors and exporters window (IEFX) in April created some sanity and stability in the forex market.
Foreign portfolio inflows are much higher now than they were at the start of 2017. The level of international investors’ participation has increased to approximately 48% of total trading activities (January- October) from 45% for the same period in 2016.
The stock market recorded two rallies in the course of the year, one in May and the more recent one which could be termed the Santa Claus rally.
Portfolio managers are rebalancing their portfolios as the year comes to an end. In addition, the oversubscription of the Eurobonds raised at the capital markets, in spite of a ratings downgrade by Moody’s, is a pointer to the growing investor confidence in the economy. The government was able to successfully raise approximately $4.5bn in Eurobonds and a Diaspora bond of $500m
G= Government Expenditure
Government expenditure increased this year, evident in the ongoing infrastructural projects and social intervention programs. The level of spending a government can embark upon is a function of the funds at its disposal. The federal government earned more revenue this year primarily due to higher oil proceeds (higher oil price and production) and tax revenue (more efficient collection process).
The monthly statutory allocation to states reached a year-to-date peak of N637.7bn in September from January’s level of N430.16bn. Nonetheless, a good number of states still have salary arrears. In order to address its high debt service burden, the government decided to exchange maturing T/bills with dollar notes. A series of international debt issues were raised to fund the deficit gap.
Nigeria’s trade balance has shifted into a surplus position from a deficit recorded in 2016. According to the Economist Intelligence Unit (EIU), Nigeria’s trade balance in 2017 is forecast at $6.1bn from $-0.5bn in 2016. The export level has grown faster than the import bill, due to a robust oil price (FY’17 average of $53.62pb) and production of 1.7mbpd- 1.75mbpd.
Constraints still Persist
The macroeconomic picture just described is positive, but in spite of this there were constraints that hindered the pace of growth and level of output. These consisted of variables within and outside our control.
Constraints within our control
The gridlock at Apapa crippled business activities and hindered productivity. This was caused by poor traffic management, construction activities and total disregard for the law. The cost of the gridlock to businesses and the economy was significant.
The high cost of borrowing is one of them. Contrary to market expectations of a reduction in interest rates, the Monetary Policy Committee of the Central Bank maintained the status quo during its six meetings held this year. This stance has actually been maintained since July 2016, when the Monetary Policy Rate (MPR) was increased to 14% pa from 12% pa. The average cost of borrowing has remained high at 25-27% pa while Nigerian Interbank Offered Rates (NIBOR) oscillated within a wide range of 2%- 148% (OBB, O/ N) depending on the level of liquidity in the system. Treasury bills, on the other hand, have declined from an average yield of 16%-18% (across all tenors) to 10%- 15% in the secondary market; an indication of a likely reduction in the benchmark interest rate.
The stability in the exchange rate is commendable. However, the existence of multiple exchange rates continues to create avenues for arbitrage and speculation.
Other constraints include the high inflation rate and underlying pressure in spite of the steady decline year to date. A state by state comparison showed a disconnect between states with the highest inflation rates and state government revenue. For instance, Kaduna has one of the highest inflation rate at 17.9% but one of the lowest FAAC shared (N4.71bn). Delta has one of the lowest inflation rates of 13.75% but its FAAC is the second highest (N12.81bn). For a state like this, it highlights the issue of mismanagement of funds. There is a positive correlation between states with the lowest inflation rate and number of months of salary arrears. States such as Kogi and Bayelsa have the highest number of months in salary arrears and are also among the states with the lowest inflation.
Policy Shifts & Decisions
On the policy front, monetary policy was left unchanged throughout the year, with the MPR at 14% pa. Fiscal policy revolved around government borrowing and revenue generation. There was increased focus on building the tax revenue buffers with the introduction of the Voluntary
Assets and Income Declaration Scheme (VAIDS). The 2017 budget was passed late and only about 45% of the budget on capital expenditure has been executed.
What are we likely to face in 2018?
2018 will be different in many ways. One of the reasons is that it is the penultimate year to the elections in 2019. The New Year will be split into two halves. The first half will be characterized by economic and policy actions.
The second will be Politics! Politics!! Politics!!!. The critical issues that will be discussed across the markets, investors, policymakers and the general public include but are not limited to the following:
1. Growth sustainability in a period of heightened political campaigning;
2. Fiscal consolidation and revenue diversification;
3. Maintaining security at a time of a highly contested political campaign;
4. Acrimonious debate of the minimum wage and its likely fallouts;
5. Government borrowing and debt management; and
6. War against corruption.
Outlook for Key Macro-Economic Indicators
The growth momentum is expected to be sustained in 2018, although at a slow pace: 2- 2.2%. The drivers of growth will remain unchanged: increased agriculture and oil production. In addition, increased infrastructural development and its impact on productivity will boost aggregate demand.
Due to political campaigning that will take effect fully in 2018, we anticipate an increase in the level of money supply, at a growth rate of 5 -10%. Broad money supply contracted by 11.06% in 2017 due to tight liquidity conditions. Also, the likely review of the minimum wage (currently at N18,000) and other social intervention programs by the government will exacerbate inflationary pressures in 2018.
Nigeria’s production levels have been capped at 1.8mbpd by the Organization of Petroleum Exporting Countries (OPEC). This cap limits Nigeria’s production levels. Hence we project that oil output will remain within the range of 1.75mbpd to 1.8mbpd, barring any disruptions to pipelines.
The exchange rate will witness some pressure due to the anticipated increase in liquidity. However, the CBN will attempt to support the currency at the expense of the external reserves level.
Economic and policy decisions will be influenced by political motives. Nonetheless, the economic recovery recorded in 2017 will be sustained in 2018 however at a slow pace of 2.2%. This is based on the assumptions of a robust oil production level and oil prices at an average of $55pb. If there are any shocks to oil production and even price, all bets are off.