Tuesday, January 20, 2015

Nigeria's Economy Forecast- 2015

In as much as I'm probably the most optimistic person you will find about the economic fortunes of Nigeria, it is always prudent to point out that Nigeria's success stories have been inspite of her national government - which has badly managed the economy on a whole lot of fronts to be honest. Indeed, the economy have grown largely due to state level governments (thank God we practice federalism like US) and probably faster in opposition controlled states starting with Lagos.

That said, Nigeria face some significant economic headwinds brought by these years of federal government mismanagement which states cannot possibly help head off or balance. But most public analysis of Nigeria's strenght have been wrong projecting optimism despite clear indications to the contrary:  skewed optimistic based on the last few years of performance. So for the next 2-3 years, macroeconomic factors - more on this later- flowing out of mismanagement (of crude oil revenues, tax policies, infrastructure policies and monetary policy) may now come to hunt us regardless of our latent strengths.
The interesting thing is that the only possible way to head off this disaster is a change in government, and reality on ground is that there is s 52-48 chance the opposition will actually win the elections of February 14 - again contrary to this report. So this might be good for Nigeria, but will not eliminate completely the upcoming pain.
A more nuanced view of the upcoming elections here from former US Ambassador to Nigeria - http://africanarguments.org/2015/01/19/nigeria-time-for-more-international-community-attention-and-action-by-johnnie-carson/

Speaking of macroeconomic factors:
  • The foreign reserve is $30 billion plus, but it has fallen 50% in less than 6 months. Many state governments could not even meet their payroll in December. The entire reserve will not be available to defend the naira and the dwindling price of crude oil has not bottom just yet as OPEC is not budging
  • Speaking about depreciation; the official depreciation was 12% but nobody trades official dollar. The parallel informal market went as far as 25-35% depreciation by EoY 2014. I exchanged the $$ at Lagos Airport for 200 naira to 1 USD; it used to be 160 naira up until October.
  • Furthermore, the MPC have been very political especially since the new governor replaced a previous one that blew the cover off a $20billion scam by the President's men. So MPC have not depreciated the naira prior to the election as much as it should and have instead been defending the naira with the dollar reserve. Expect that to change quickly once the election is over - either way and regardless of who emerges victor.
  • As a proof of my point and to counter deflationary impact of fuel imports, the official price of gasoline was cut by 10% this week when world prices have moved down by more than 40%. This is because of the discount imposed devaluing the naira, and the fact that a country that produces 2.5 million barrels of crude oil, still depend on import (80%) to meet her local demand due to comatose state owned refineries crippled by corruption. The good thing is that entrepreneurs are now taking cue and will soon cut off the dependence on the government or imports ( http://www.bloomberg.com/news/2014-11-17/dangote-says-nigeria-lagos-refinery-to-start-by-mid-2018.html ) but the use of arcane subsidy schemes can distort the market and discourage investment. Change of guard can help this cause as well.
  • While I don't expect post-election violence, this cannot be written off and remains a huge risk on the economy; banks as a result are experiencing outflow into election financing or flee to quality outside the country due to this as well as devaluation fears.
In sum total, wait until March ending to decide and until after May 29 to put your money to work. I have significant exposure to Nigeria equities, but I won't buy just yet until some degree of certainty in policy direction is restored after the election. The greatest risk to any foreign investor remains the uncertain valuation of the currency due to economic mismanagement by the Feds.
The best sectors to invest in Nigeria remain the consumer and technology sectors. It is however best to utilize domestic funds for this purpose.
Impact of Crude Oil Price Drop on Nigeria Indigenous E&P
Do you think the price drop is temporary or will be externed? On one hand, I will like to think it will be extended given prevailing general wisdom, but we have to remember other key drivers of oil price i.e. geopolitical forces (an imbalance of supply from Libya or Iraq or Russia can increase pressure on the market without warning) and net increase in world demand due to economic growth (a 6-9 months sustained lower price of crude oil will inevitably lead to economic growth in China and South America which will lead to higher net demand and then higher price)
I think we will be very lucky to see prices stay below $60 until summer. But I also don't think we will see $100 any time soon. Best median price is $55, and I hope Nigerian small producers are using something discounted to this figure to manage their books


this is www.busanga.com