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LBS Alumni DayNigerian Economy in Perspective 2019 –
Dysfunctional Policies & Structural Rigidities
By Bismarck Rewane
November 15th, 2018
Outline
Diagnosis & Challenges
Prognosis & Recovery
2
Latent & Specific Opportunities
Conclusion
Policies & Impact
Downside Risks & Economic Down Syndrome
HOW DID WE GET HERE
3
6.21
6.546.23
5.94
3.96
2.35
2.84
2.11
-0.67 -1.49
-2.34
-1.73
-0.91
0.72
1.4
2.11.9
-3
-2
-1
0
1
2
3
4
5
6
7
Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 *2018
% The Boom Period
Slowdown Recession Early Stages of
Recovery
Source: NBS, *: EIU, FDC Think Tank
2014 2015
2016
2017/18
Nigeria’s Growth Tra jectory
Boom (2014)
•Average Growth rate: 6.22%
•High oil prices at an average of $99.26pb
•Peak of $116pb before closing the year at $56pb
•Stable production: avg. of 1.91mbpd
•Start of a commodity shock (oil) mid 2014
Slowdown (2015)
• 2015 growth rate: 2.79%
• Commodity shock in full swing
• Average oil prices dropped to $53pb
• Closed the year at $36pb
• Production relatively stable at an avg. of 1.86mbpd
• On set of a currency crisis
• Capital controls introduced- ban on 41 items
• Nigeria removed from JP Morgan & Barclays’ EM indexes
• 27 state governments insolvent and with salary arrears
Recession (2016)
• 4 quarters of negative growth
• FY’ 16 growth rate: -1.58%
• Incessant attacks on pipelines – sharp drop in oil production: 1.6mbpd (avg.)
• Avg. oil prices: $45pb
• FY’17 low: $27pb
• Full blown currency shock and economic crisis
• Naira was adjusted twice
• N199-N280-N305/$
• External reserves dropped to $23.9bn
• Inflation rose to 18.55% (Dec’16)
• Fitch downgrades sovereign debt rating to B+
Recovery (2017/18)
• FY’17 growth: 0.83%
• Q2’18: 1.5%
• Gradual but uneven recovery
• Oil prices touched almost 5 year high of $86pb in Oct’18
• Currently trading at $69.43pb
• Stable oil production: 1.75mbpd (Sept’18)
• Sustained depletion of external reserves
• Now at $41.74bn
• Inflation down up 11.28% (Sept’18)
Slowdown -> Deterior ation -> Recov ery
DIAGNOSIS &
CHALLENGES
6
Growth ProblemGrowth has underperformed the global and regional average for 3 years
Average GDP growth in 5years = 2%
Average population growth rate = 3%
GDP –Population = -1%
Income inequality compounded by opportunity inequality
Gini coefficient =43
5% of the population have approximately 40% of GDP7
3.73.11.9
-2
-1
0
1
2
3
4
5
6
7
2014 2015 2016 2017 2018
Global SSA Nigeria
Investment Problem
Source: EIU8
Y = C + I + G + X - M
Investment
Foreign Portfolio Investment (FPI)
Foreign Direct Investment (FDI)
Pension FundsStock Market Capitalization
Gross Capital Formation
National Savings
Nigeria’s investment is suboptimal
RoI Cost of debt servicing
I = Io – Ir + Iy
Io = autonomous investment; r = interest rate; y = income
$61
Debt Problem
Debt crisis
10% growth in total debt
Increase in non-contractual debt to $28.1bn
Debt-to-GDP ratio of 21%
60% of independent revenue of FGN used for
debt service
52.6% export to debt ratio9
Income Inequality Problem
Poverty – Poverty crisis
42.4% of the population in abject
poverty
Nigeria now poverty capital of the
world
Lack of investment in education
continues to widen the Gini-
coefficient
Poverty map of Nigeria
10
Education rate (School Attendance)
Subsidy Problem
Subsidy – Petroleum problem
Under-recovery skyrockets
Budget target for subsidy = $3.85bn in 2018
Subsidy in April when price was
April $70pb = $215mn = N1.4trn, 13.35% of budget
August $77pb = $245mn per month
September $85pb = $270mn per month
The double edged sword 11
Energy Problem
FGN needs $1trn to upgrade energy infrastructure
Nigeria’s thermal power stations remain underutilised due to uncompleted
plants and gas constraints
Financial sector exposure to oil and gas averaged 30.6% in 2018
Average exposure to the power sector– 4.8%
These sectors remain major drivers of banks’ impairments (35%)
The strict policy environment will weigh on the risk appetite of most banks
Due to the implementation of IFRS 9
12
Addressing Structural rigidities & Deficiencies
Increase National Savings (NS)
NS = Investment
Intensify fiscal consolidation efforts
Sign Africa Continental Free Trade Agreement (AfCTA)
Free subsidy quickly
Cost reflective tariff
Sell refineries
Allow currency float-convertible currency
IMF BOP support programme 13
KEY ECONOMIC INDICATORS &
OUTLOOK
14
LEI H1’18 H2’18 % Change Impact
GDP Growth
(%)
1.95
(Q1’18)
1.5 (Q2’18) -0.45 • Lower GDP reflects reduction in economic activities
• Could result in lower labour demand
Oil Price ($pb;
avg)
71.16 76.71 7.80 • Higher oil prices is positive for FAAC, external reserves
Oil Production
(mbpd) (avg)
1.73 1.71 1.16 • Oil production below the budget benchmark of 2.3mbpd
• Could limit the benefits of rising oil prices
Average power
output (MW)
3,856 3,661 -5.06 • A decline in power output would increase demand for
alternative sources of energy such as diesel
• Increasing operating costs of firms with a likely reduction
in net profit margins
PMI (end period) FBN:
49.8
CBN: 57
FBN: 53.6 (Sept)
CBN: 56.2
(Sept)
FBN: 7.63
CBN: -1.4
• Higher PMI suggests an expansion in manufacturing sector
activities
Unemployment
rate (%)
16.2
(Q2’17)
18.8(Q3’17) 2.6 • An increase in unemployment rate weighs on misery index
Source: CBN,NBS, EIU, FDC Think Tank
Key Economic Indicators
LEI H1’18 H2’18 % Change Impact
External Reserves ($bn)
(end-period)
47.79 41.79 -12.55 • Sustained depletion of the reserves limits the CBN’s
ability to support the naira
Exchange rate – Parallel
Market (N/$; end period)
362 363 -0.28 •Relative calm in the forex market positive for market
confidence
Money supply (N’trn) (end
period)
24.81 24.86 0.2 •Remained relatively flat compared to CBN benchmark of
10.98%
Inflation (end-period; %) 11.23 11.28 0.05 •Inflation declined for 18 consecutive months before
reaching and inflection point in July
T/Bills (91 days; end-
period) – Primary
11.00 10.50 -0.5 • Reduction in yield of fixed income securities
Stock Market (N’trn)-end 11.96 11.83 -1.09 •Exodus of hot money (FPI) weighed on the bourse
Key Economic Indicators
Source: CBN,NBS, EIU, FDC Think Tank
Mixed Bag of Economic Indicators
Impact
Economic challenges persist
External imbalances are growing
Vulnerabilities are rising
Risks are elevated
4
7
1
Positive Negative Neutral
MACROECONOMIC INDICATORS OUTLOOK
GDP Growth to advance to 2.1% in 2019 FY’18 GDP growth - 1.9%
FY’19 - 2.1%
Driven by:
Higher oil prices & stable oil production
Improvement in agric sector
performance
Risks to growth in 2019 include:
Disruptions to 2019 election
-0.91
0.72
1.4
2.11 1.951.5
1.7 1.82.1
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
GDP growth (%)
Source: NBS, FDC Think Tank
Oil Market Outlook
Nigeria is more oil production sensitive than price
sensitive
Oil production expected to remain stable 2018/2019
Oil prices will remain above budget benchmark
Supported by
Robust demand amid US sanctions on Iran
Stable domestic oil production (~1.7mbpd)
Escravos, forcados and other pipelines will be protected and
force majeure minimised
Source: OPEC, Bloomberg, FDC Think Tank
69.13 71.5876 78
1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
0
10
20
30
40
50
60
70
80
90
Jan
'18
Fe
b'1
8
Ma
r'1
8
Ap
r'1
8
Ma
y'1
8
Jun
'18
Jul'
18
Au
g'1
8
Se
p'1
8
Oc
t'1
8*
No
v'1
8*
De
c'1
8*
Average oil prices ($pb)
Average oil production (mbpd)
20
Inflation Outlook
Source: NBS, FDC Think Tank
15.1314.33
13.3412.48
11.61 11.23 11.14 11.2311.2811.5011.9012.50
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Inflation (%)
21
The increasing inflation trend
expected to persist in 2019
2018 (end): 12.50%
2019 (end): 13.0%
Boost in liquidity stemming from:
Minimum wage review
Campaign spending
Increased FAAC disbursement
External Reserves Outlook Gross external reserves is a victim of hot money
exodus
CBN has prioritised Naira stability over reserves
accretion
Projected to hover around $40bn by 2018-end
External reserves depletion to continue into 2019
Despite proceeds from Eurobond
External reserves to external debt ratio will
deteriorate
Source: CBN, FDC Think Tank
40.69
42.49
46.26
47.4947.79
47.12
45.84
44.3143.44
42
40
36
38
40
42
44
46
48
50
Jan
'18
Fe
b'1
8
Ma
r'1
8
Ap
r'1
8
Ma
y'1
8
Jun
'18
Jul'
18
Au
g'1
8
Se
p'1
8
Oc
t'1
8
No
v'1
8*
De
c'1
8*
22
Interest Rate Outlook
Source: CBN, FDC Think Tank
0
5
10
15
91-day 182-day 364-day
Interest rate environment will remain high
Buoyed by the government’s debt acquisition
Banking industry will remain lending averse
Due to the implementation of IFRS 9
Treasury Bills (% pa)
23
POLICIES &
IMPACT
24
Minimum Wage Review
Proposed minimum wage is 67% higher at N30,000
Minimum Wage Asset Under Management
Money Supply Inflation
Promissory Notes
Securitization of contractor and oil marketers debt by the DMO
Contractors: N483bn (10-year)
Oil marketers: N288bn (10-year)
The promissory notes would be cashed out at a discounted rate
Redeemed notes increased naira liquidity heightened
inflationary pressure
However, transmission effect of increased money supply remains minimal
Monetary Policy Responses
The MPC meeting is scheduled to hold on Nov 19/20
Key considerations would be:
US Fed rate hike in December and its impact on capital flows
The resurgence of inflationary pressures
Increased liquidity from pre-election spending and FAAC distributions that
are rising in tandem with increase in oil receipts
External reserves depletion
Likely policy direction: increase MPR to 14.5%, CRR: 22.5%, LR: 30%,
Asymmetric corridor: +2%/-5%
Impact
Curtail inflationary pressures
Reduce capital reversal
Weigh on credit to the
private sector
Constraining economic
growth
Positive Negative
PROGNOSIS &
RECOVERY
29
Scenario – Normal
Assumptions
Oil Price: $68pb – 13.3% higher than the budget
benchmark price of $60pb
Oil production: 1.75-1.77mbpd
Forex market structure to remain the same
No IMF support (home-grown solution)
Impact on Indicators
2019
GDP Growth (%) 1.9-2.0
Inflation (%) 13
Money Supply (M2) Growth (%) 4.3
Net FDI ($’bn) 2.5
External Reserves ($’bn) 43
Exchange Rate (N/$, IEFX) 369-375
Fiscal deficit (N’trn) -2.1
Balance of Trade ($’bn) 19.8
Scenario – Shock
Assumptions
Oil production shut-ins from renewed
militancy – down to 1.4mbpd
OPEC cut lowers Nigeria’s quota
US shale resurgence leading to a global oil
supply glut
Oil prices down to $40pb
Impact on Indicators
2019
GDP Growth (%) -0.9
Inflation (%) 15.9
Money Supply (M2) Growth (%) 2.1
Net FDI ($’bn) 2
External Reserves ($’bn) 30
Exchange Rate (N/$, IEFX) 410-430
Fiscal deficit (N’trn) -2.1
Balance of Trade ($’bn) -8.5
DOWNSIDE RISKS
Crit
ica
lM
ajo
rM
ild
Unlikely Possible Probable
Downside Risk In the event of a rigged election
Oil below
$40pb
Wage increase
in the face of
Oil Revenue
Slump
Exchange
rate Crisis
Debt service
to export
revenue
>70%
Fall in oil
production
Post-election
political crisis
and violence
Higher than
expected
Fed rate
hike
Farmers-
Herdsmen
Crisis
Hard Brexit
Escalated
Trade Wars
Debt Crisis
Slowdown in
global growth
Reduction in
oil output
Quota
LATENT & SPECIFIC OPPORTUNITIES
Trade
FY’18/19
-2.57 -2.14 -1.9
2.02.01.5
1.8 1.9
-4
-3
-2
-1
0
1
2
3
Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*
Trade (%) GDP Growth (%)
Highly fragmented market
Constitutes 16.45% of GDP
2nd highest employer after Agric.
Sector grew by (-2.14%) in Q2’18
Sector’s growth projected to move towards
positive territory, driven by
Boost in demand arising from
minimum wage review
Stable FX rate
Logistic concerns remain key constraints
Agriculture
FY’18/19
3.00
1.19
1.6
3.0
2.0
1.51.8 1.9
-2
-1
0
1
2
3
4
5
Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*
Agriculture (%) GDP Growth (%)
Highly fragmented market
Contributed 22.86% of GDP (Q2’18)
Sector grew by 1.19% in Q2’18
Projected to grow by 3.0% in 2019
On the back of
Continuous government interventions
through the CBN, FMARD, BOI
FX earnings potentials of the sector
To benefit from robust payment systems
FY’18/19
3.67
0.68
3.1
3.6
2.0
1.51.8 1.9
-4
-3
-2
-1
0
1
2
3
4
Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*
Manufacturing (%) GDP Growth (%)
Manufacturing Dominated by few players
Sector growth rate of 0.68% (Q2’18)
Contribution to GDP: 9.29% (Q2’18)
Average lending rates – 20%
Benefiting from improved FX liquidity
Improved internal efficiency
Payment of salary arrears and wage
increment
Stable FX rate
ICT
FY’18/19
1.58
11.81
7.5
10.0
2.0 1.5 1.8 1.9
-6
-4
-2
0
2
4
6
8
10
12
14
Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*
ICT (%) GDP Growth (%)
Oligopolistic Market
Sector growth rate of 11.81% (Q2’18)
Contribution to GDP of 13.63% (Q2’18)
Policy environment unfavorable to key players
Growth will be driven by:
Increased investments into the sector
Injection of funds into Telcos (fintech –
Mobile payments)
Improved internet penetration (to 30% from
22%)
Banking
FY’18/19
12.58
0.81
7.0
3.02.0 1.5 1.8 1.9
-10
-5
0
5
10
15
Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 2018* 2019*
Banking (%) GDP Growth (%)
Key dominant players
Sector growth rate of 0.81% (Q2’18)
Contribution to GDP of 2.78% (Q2’18)
Financial system remains robust
Going forward
Banking earnings will be more reflective of realities
From the gradual implementation of IFRS 9
Waning interest income from high yield government
securities
Non-interest income will continue to gain traction
Implication of Mobile Banking
Nigeria’s Payment System
Barter Gold Paper Electronic
Payments
Mobile
PaymentsCommodity
Money
Mobile banking payments will reduce transaction cost significantly
Increasing the speed of velocity of circulation
Margins of most players in the formal banking system will be narrow
Emphasizing the need to collaborate with Telcos
Conclusion
Conclusion
Nigeria will remain commodity dependent and policy reliant
Economic growth story will remain intact except there is a steep decline in oil price
No matter the political outcome, it will be positive
More positive if we go for free markets but modestly positive if we have a mixed
economy
Challenges remain but the democratic process is becoming more and more
representative because of technology
In the mean time, emphasis will be on investment by both the government and
private sector, proper governance and rule of law
Conclusion
Business success will depend on how efficient the business model is – economies of
scale and cost optimization
We should be gasping by Christmas 2019
But again we could be smiling Xmas 2020
44
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