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Expect Huge Election Spending, Slow Economic Activities in 2019 – Experts

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  • Expect Huge Election Spending, Slow Economic Activities in 2019 – Experts

The N8.83tn 2019 budget predicated on the oil price of $60 per barrel was only presented to the National Assembly late December and has been generating a lot of concerns.

The Federal Government, in the budget, had expected production of 2.3 million barrels per day, while it still has a current output of about two million barrels per day.

As of the time the budget was being prepared, the global benchmark crude rose to $86 per barrel in October 2018, which led to the expectation that the high price could be sustained, before it started falling, and currently now at $55 per barrel.

This is further generating worries on how realistic it will be to achieve the set targets, as the oil sector generates the highest revenue to the government.

Also, given that 2019 is a year of the general elections; foreign investors would be keen on knowing if there would be consistency or abortions of government policies.

The outcome of the elections, if the incumbent government would remain, would determine their investment decisions in the country.

Elections

The Director-General, Chartered Insurance Institute of Nigeria, Mr Richard Borokini, said that 2019 was a year of elections, and things were usually a bit uncertain.

He said, “In an election year, things are usually a bit uncertain at the government level. People don’t know whether there will be a change in the government, and if there is a change in the government, economic policies will have to change.

“And these are the things that investors will look at and it will make them become a little bit patient to know whether there will be consistency or change in policies.”

In the first half of 2019, he said, the government spending would be linked to politics and mostly, sectors that were directly related to elections would benefit. For instance, he said the communications industry would attract a lot of adverts and the automobile sector because there would be purchases of vehicles for the electioneering.

According to him, the slow pace of passing the 2019 budget will have an overall effect on economic growth.

The Registrar/ Chief Executive Officer, Institute of Credit Administration of Nigeria, Prof Chris Onalo, said there would be a lot of concentration on the election process by the government and the economy would suffer for it.

“If that persist through the first quarter, it will affect the outcome of the economy in terms of positive expectations,” he added.

While speaking on the impact of the oil price, he said, “The one product that we rely on, which is oil, will be highly constrained because of the singleness of that product in terms of revenue drive.

“Quite significantly, it is not going to increase the credit rating curve at the upward direction because we are dealing with one single product that is not strong enough to carry the weight of the Nigerian economy against the backdrop of other sectors.”

He observed that though the government was paying greater attention to the development of the agricultural sector, it had not yet come to a level where it could be an export industry.

“So we still have a weak agriculture sector and that will seriously depress the oil outlook,” he said

He noted that the low capacity condition of the Nigerian labour market was still a significant factor.

Even if there was a huge amount of revenue from credible export products, oil and others, he said there was still weak internal capacities of the managers of the economy, which would constrain the economic outlook significantly.

Onalo said, “I think it is even further compounded by the threat of a strike in private and public sectors of the economy. So when you add up all these, needless to remind ourselves of the comatose manufacturing sector that we have, the industry that was once flourishing has gone into extinction. And if we can’t have them back, that condition continues to depress the manufacturing sector.”

Budget

A former President, Association of National Accountants of Nigeria, Dr Samuel Nzekwe, having looked at the 2019 budget presented by President Muhammadu Buhari, observed some defects.

He said, “I would have loved the government to bring down the benchmark of the oil price to between $45 and $48 because that is more realistic. You don’t know when the price will go up.

“If they had brought it down to $45, it is going to affect the budget seriously, but that notwithstanding, we know that we have a supplementary budget so that in case the oil goes up, there could be provision for those areas that were not covered in the budget.”

He lamented that most budgets prepared in the past lacked cash backing and that was why the implementation was very slow and low.

He urged the government to bring one price down from $60 per barrel, but with the hope that the price would go up later.

Nzekwe observed that one other big problem was the debt servicing which was more than the capital expenditure, which meant that about a quarter of the budget would be used to service debt.

He said, “That is terrible. They have to look at the loans they are taking and in most times, they say the loans are directed at one aspect of the economy or the other. But what we discover is that they take these loans but they have no impact on the economy.

“When they take the loans, there is no local content inside it. All the things they use here to implement the projects from the loans are from other countries like China. So technically, you have paid up the money back to them and you still owe them.

“The government needs to look at the loans they are borrowing, and they should ensure they don’t continue to take loans that have no local content so that debt servicing will not be so much.”

While observing that the implementation of the budget which was presented in December was too late, he said it should have been presented around September and the implementation should have started this month.

The Chief Executive Officer, Economic Associates, Dr Ayo Teriba, said the outlook of the Nigerian economy depended on the price of oil.

“If the price of oil improves, the Nigerian economy will improve but if the price of oil falls, the Nigerian economy will fare worse,” he said.

By announcing a price of $60 per barrel, he said the government was hoping that the price of oil was going to be stronger in 2019.

If that happens to be the case, he said, the economy would be fine but there was a possibility it might not be the case.

He said, “I think it is more or less a gamble of the price of oil in 2019 and Nigeria should do better than that. We should not leave 200 million people at the mercy of the price of oil. We should have a contingency or alternative plan.”

According to him, the government is not forthcoming over what can happen if the oil price goes as bad as it did in 2016 or worse.

Teriba said, “The sooner we start to look at how we can correct negative downside of oil price, the better. This is what the government is not talking about because in the event of a negative downside, prepare for the worse.”

Foreign influence

According to a report by the FSDH Merchant Bank on the outlook for 2019, 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.

It noted that there were 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 might also lead to an increase in the interest rate in Nigeria because of monetary policy adjustments to reduce capital flight, it noted.

According to the report, “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.”

It stated that 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 did not have foreign exchange receivables to mitigate the possible foreign exchange risk, it added.

The FSDH Research also advised that businesses should put in place appropriate foreign exchange hedging strategies.

While noting that there were certain macroeconomic realities that the Nigerian government must contend with in 2019, the report said the fiscal deficit in 2019 might be higher than that of 2018, and higher than what was projected for the year 2019.

Economic policies

While speaking on the outlook and policy thrust for 2019, the Central Bank Governor, Godwin Emefiele, said the global growth projections both for 2018 and 2019 had been revised downward to 3.7 per cent from the 3.9 per cent earlier projected.

He said, “Growth momentum in the US is projected to remain strong as fiscal stimulus continues into 2019. In emerging markets, growth forecasts are revised downward for Argentina, Brazil, Iran, Turkey, and South Africa reflecting country-specific factors, uncertainties in the financial conditions, and rising geopolitical tensions as well as higher oil import bills.”

In light of the current developments in both the global and domestic economies, and based on extensive simulations, he said the CBN was of the view that the short-term outlook of the Nigerian economy remained good.

He said, “We expect that monetary policy stance will remain judicious, research-driven, adequate and supportive of the real economy subject to underlying fundamentals. The current tight stance is expected to continue in the near-term, especially in view of rising inflation expectations and exchange market pressures.

“Though we will act to appropriately adjust the policy rate in line with unfolding conditions and outlooks, the CBN will continue to ensure that the policy interest rate is delicately set to balance the objectives of price stability with output stabilisation.”

According to Emefiele, inflation expectations are rising on the backdrop of anticipated politically-related liquidity injections.

He said, “For the rest of 2018 and towards mid-2019, Nigeria’s rate of inflation is projected to rise slightly to about 11.4 per cent and then moderate thereafter.”

On the exchange rate, he said, “Though the CBN has so far managed to maintain exchange rate stability, the current capital flow reversals from emerging markets is expected to continue to exert considerable pressure on market rates. This pressure could be amplified by the forthcoming elections, especially as the political marketplace heats up. Notwithstanding these pressures, the CBN is determined to maintain its stable exchange policy stance over the next few months given the relatively high level of reserves.”

He noted that gross stability was projected in the FX market given increased oil-related inflows and contained the import bill.

He said, “I will like to make it categorically clear that sustaining a stable exchange rate is of overriding importance to us even as we continue to put measures in place to shore up reserves.”

The CBN governor said the overall balance of payments was expected to remain positive in the short-term.

“Hoping that oil prices continued to recover, we expect the current Account Balance to strengthen even further. This will be supported by improved non-oil performance as diversification efforts begin to yield results to reduce undue imports.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Economy

AfCFTA: Nigeria-South Africa Chamber Advocate Single Africa Passport, Free Visa

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African Continental Free Trade Area (AfCFTA)- Investors King

The Nigeria-South Africa Chamber of Commerce (NSACC) has called for a single Africa passport and a free visa to ensure the success of the Africa Continental Free Trade Area (AfCFTA) agreement.

Speaking on Thursday in Lagos during the chamber’s September Breakfast Forum, with the theme: `Perspectives on the Africa Continental Free Trade Area in Relation to Nigeria’, its President, Mr. Osayande Giwa-Osagie noted that AfCFTA would boost intra-African trade by 22 percent, adding that its implementation would impact positively on the Nigerian economy.

AfCFTA is a single continental market that adopts free flow of goods, services, and capital, supported by the free movement of persons across Africa.

Giwa-Osagie however said Nigeria must diversify its economy in order to harness the gains of the agreement.

“Current intra-African trade rated at 15 to 17 percent is low and the AfCFTA is expected to boost intra-African by 22 percent. Challenges to its implementation are lack of infrastructure, political instability and lack of economic diversification.

“This gives rise to the need for Nigeria to diversify its economy to harness the gains of the agreement. Given the importance of the free movement of people, there is a need for a free visa for Africa and a single Africa passport.

“While the implementation would help boost the Nigerian economy, the impact would be limited if there are no free movement of people,” he said.

Mr Jesuseun Fatoyinbo, Head, Trade and Transactional Services, Stanbic IBTC Bank, said the business community needed more clarification on tariff reduction or elimination under the agreement.

According to him, the little information available to corporate organisations with regards to tariffs may lead to holding back on investments.

“We have noted increased interests from global multinationals and other corporates in setting up facilities in Africa aimed at serving the continent and exporting abroad.

“So more transparency around tariff reductions both in terms of timelines and details of goods could prompt companies to act,” he said.

Fatoyinbo also called for more attention to the digitisation of trade processes across the continent. “Currently, trade in Africa is largely reliant on physical documentation and this is a major impediment. Policymakers need to prioritize regulatory amendments that allow for the digital signatures, a digital certificate of origin, digital bills of lading, and other documentation,” he added.

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Nigeria Borrows $4 Billion Through Eurobonds as Order Book Peaked at $12.2 Billion

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Eurobonds - Investorsking

The Federal Government of Nigeria has raised a fresh $4 billion through Eurobonds, according to the latest statement from the Debt Management Office (DMO).

Nigeria had set out to raise $3 billion but investors oversubscription peaked at $12.2 billion, enabling the Federal Government to raise $1 billion more than the $3 billion it announced.

DMO said “This exceptional performance has been described as, “one of the biggest financial trades to come out of Africa in 2021” and “an excellent outcome”.

Bids were received from investors in Europe, America, Asia and several local investors. The statement noted that the quality of investors and the size of the Order Book demonstrated confidence in Nigeria.

The Eurobonds were issued in three tranches, details, namely seven years–,$1.25 billion at 6.125 per cent per annum; 12 years -$1.5 billion at 7.375 per cent per annum as well as 30 years -$1.25 billion at 8.25 per annum.

The DMO explained that the long tenors of the Eurobonds and the spread across different maturities are well aligned with Nigeria’s Debt Management Strategy, 2020 –2023.

The Eurobonds were issued as part of the New External Borrowing stipulated in the 2021 Appropriation Act. DMO noted that the $4 billion will help finance projects state in the 2021 budget.

Nigeria’s total debt stood at $87.239 billion as at March 31, 2021. However, with the $4 billion new borrowing, the nation’s debt is now $91.239 billion. A serious concern for most Nigerians given the nation’s weak foreign revenue generation and rising cost of servicing the debt.

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CIBN Banking and Finance Conference 2021: Structural Transformation and Growth

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Coronation Merchant Bank - Investors King

Today we highlight one of the sessions, ‘Economic Recovery’, at the recently concluded CIBN Banking and Finance conference. This was a hybrid event in Abuja, Lagos and partially virtual last week. The Covid-19 disruptions have created demand and supply shocks in the global system while unlocking new opportunities for growth.

Given the pre-existing financing challenges and growing spending needs, many developing countries are in dire need of financial support. As a result of the pandemic, the financing gap for the sustainable development goals increased by 70% (over USD4.2bn). The speaker on this session, Amina J. Mohammed, Deputy SecretaryGeneral of the United Nations and Chair of the United Nations Sustainable Development Group focused on structural transformation, technology, finance and sustainability.

Recent developments such as the allocation of the USD650bn in Special Drawing Rights (SDR) were highlighted during the session. Although the SDR offers improved liquidity into the system, Africa is set to receive only USD32.2bn (or 6.4% of the total amount). Therefore, it is important that the funds are channeled towards well-targeted sectors that can contribute to sustainable development.

The banking and finance sector plays a crucial role. The Africa Continental Free Trade Area (AFCFTA) agreement offers an opportunity for the financial sector to work within a continental market of 1.2 billion people. According to Amina J. Mohammed, three main actions areas will reshape the financial sector and support stronger recovery.

The first, better customer engagement with a dynamic range of relevant products and services that go beyond bank-based financing mechanisms and offer innovative financial products tailored to specific needs of business ecosystems. Second, the adoption of new operating models to drive efficiency and inclusion. Third, a deliberate focus on enabling sustainable development investing.

Furthermore, Nigeria’s banking and finance industry is well positioned to drive specific UN sustainable development goals such as inclusive and affordable credit, especially for micro, small and medium-sized enterprises. The industry can also provide support towards climate change.

Technology also featured in the discussion points. Undoubtedly, technology is a catalyst for growth across economies and the pandemic has further exposed the deficit within the sector across developing countries. Investments in digital infrastructure need to be rapidly expanded and scaled up to boost socio-economic development.

The speaker commended the FGN’s efforts on its push towards sustainable economic recovery. Some policy and regulatory reforms highlighted include, regulation of fintechs and related services to strengthen payment systems and regulate data protection; the green bonds which Nigeria first issued in 2017 in support of green projects, including solar energy and the modernisation of the Nigerian stock exchange that has given rise to a new operational structure and leadership.

These are laudable steps. However, we note that there is still room for improvement. To achieve double-digit GDP growth and sustainable development, structural transformation should remain on the FGN’s priority list.

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