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2018 promises relief after Nigeria’s recent economic woes 08 Jan 2018

“Time heals all wounds.” In Q3 2014, the prices of crude oil started a downward spiral. Policy missteps by the administration of President Muhammadu Buhari later combined with the tumbling oil prices, resulting in the contraction of the Nigerian economy throughout 2016. However, that price cycle has ended. Since Q2 2017, the economy has begun to muster growth. The hitherto pallid economic recovery is expected to strengthen in 2018.

    
There are three key concerns about the Nigerian economy this year. One, continued move towards interest rate normalization in the United States may hurt the local financial market through a reversal of financial flows. Two, a black swan – possibly a disastrous geopolitical event, or a disorderly correction in the U.S. equity market – can roil the world’s financial markets. And, three, Nigeria itself heads into another electoral cycle that is guaranteed to either distort resource allocation or undermine socioeconomic stability.

Regardless, the outlook of Nigeria in 2018 is positive. Not only is the aggregate economy expected to grow stronger, material improvements in the welfare of Nigerians are anticipated. The linchpin of the economic recovery was the decision by OPEC and non-OPEC producers, led by Russia, to extend the existing oil production cuts until the end of 2018. Yes, there are risks to the agreement. For instance, if Russia feels the U.S. shale producers are taking undue advantage of the production cuts, it may reconsider the agreement. With some OPEC producers likely to follow suit, the agreement would unravel.

But more likely in 2018, the agreement will serve as a stabilizing factor for prices at the current threshold of $60 per barrel for the Brent Crude. With the benchmark price of oil at $45 per barrel in the 2018 budget, we can have significant reduction in the budget deficit or build up fiscal savings in the sovereign wealth fund or the Excess Crude Account, while accretion to the CBN’s foreign reserves would continue. The macro and financial stability this portends for the country would serve as a bulwark against the temporary shock that may occur as a result of an energy market realignment in the course of the year.  

This positive scenario also supports an upbeat outlook of the Nigerian financial markets. The equity market, on the balance of both local and international market dynamics, is expected to continue to grow. The main index of the Nigerian Stock Exchange (NSE) grew by 42 percent in 2017.

We see the attenuation of the risk of a sharp portfolio outflow from Nigeria on account of interest rate normalization in the U.S. and, perhaps, the Eurozone. The risk itself has been potentially exaggerated. Very likely, rate tinkering – instead of aggressive cuts by the US Federal Reserve and the European Central Bank – will likely hold sway. While academic economists continue to agitate over ‘unending’ abnormally-low interest rates in the advanced markets, the gains of winding down the policy that averted the second Great Depression during the 2008 – 2009 crisis remain conjectural. Thus, the central bankers are likely to continue their circumspection. Besides, Nigeria’s benign fiscal outlook and continued dollar liquidity in the FX market would give investors comfort.

The real risk to the Nigerian stock market in 2018 would be a dramatic correction in the U.S. equity market, which had run even much further ahead of the real economy in 2017. Whereas the Dow Jones grew by 25 percent last year, the US economy was expected to grow by about 3 percent. But no one can tell when the correction would occur and if it would be disorderly. However, a U.S. stock market crash would immediately spark a flight to safety, denting the risk appetites of global investors who the CBN had deliberately courted with its policies in the past year, and who had helped to fuel NSE’s index growth.

If as things appear – the outlook of fiscal policy is bright, even if not great, and monetary policy is set to ease – the banking sector growth would seem assured. Indeed, the opportunities for the banks to continue to grow their top line and profit in 2018 are in lockstep with the economic recovery.

In the past two years, bank financing for the record-level budget deficits of the federal government had compensated the banks for their loss of public sector deposits with the implementation of the Treasury Single Account. The kill the banks have been making from buying government bonds will be little moderated, notwithstanding the decision to rebalance the public debt portfolio in favour of external financing. With the government non-oil revenue optimistically set at N4.17 trillion in the 2018 budget, actual borrowing could overrun the budgetary deficit of N2.01 trillion. What’s more, as the CBN starts to ease monetary policy, the banks would be more liquid and able to create risk assets in the real sector to broaden their earnings.

All of the above bode well for a positive welfare outlook for Nigerians. A stronger Nigerian economy in 2018 would start to reverse the job losses of the last few years. While the private sector will lead in job creation as businesses restart or expand their operations, public sector workers will see more regularity in the payment of their salaries and emoluments.

Inflation is expected to trend downward a bit faster, compared to the sluggish pace of 2017. The various positive developments in the agricultural sector, headlined by its 3.06 percent growth in Q3 2017, will support food availability at lower prices and also boost the income of the smallholder farmers.

The big performance gap in the economy this year would be in the delivery of social services. Access to quality education and healthcare would remain at deplorable levels, further emasculating human capital development and utilisation. Also, electioneering could worsen insecurity. As with just about all situations, the agency of time requires complementary interventions. In delivering social development, the combination of good public policy is required.

In effect, the perennial under-performance of the economy would continue in 2018. Whereas the Buhari administration has learnt from some of its past mistakes, it has failed to demonstrate innovative policy-thinking, or successfully implement its versions of the antiquated policies. Nevertheless, the economy is heading inexorably to post-recession growth.

We should proceed into 2018 with optimism. I wish you Happy New Year!