Published On: Thu, Dec 14th, 2017

2017: Investors look back in defiance


The year 2017 was not supposed to be a happy one. Inflation was 18.72 per cent at the beginning of the year, unemployment had jumped a few hoops to settle at 25 per cent for those between the ages of 18 and 25, while lending rates had gotten stuck in a band between 25 and 28 per cent per annum as gross national product (GDP) grew at a stifling 0.5 per cent in the first quarter. Gloom was not a possibility buta reality. Despite the signs of decay, the economy has shuffled out of the corner and started to show promise as the stock markets All Share Index (ASI) posted a year to date (YTD) yield which climbedfrom a low of -3.12 per cent in January to 47.50 per cent at the beginning of December, an alchemist’s magic trickforged from rising international oil prices and growing investor exuberance.

With the economy showing signs of decisive growth and analysts predicting that the year 2018 would see higher levels of fiscal spending accommodated by reluctant increases in money supply, the growth rate for the year could easily be somewhere between 2.8 and 3.1 per cent per annum. Whether it ends up being the lower or higher numeral depends largely on the Central Bank of Nigeria’s (CBN’s) response to increased public spending in the New Year. The fact that 2018 is a pre-election year should bring about majorincreases in fiscal and non-fiscal spending as politicians fuss about how to convince voters to reelect them in the next election cycle. This has both good and bad side effects.

On the good side increased fiscal spending, if supported by money supplygrowth, should bring down domesticinterest rates and increase localconsumer spending. This should raise GDP a notch and hopefully increase employment.If this happens the All Progressives Congress would want to take credit for pulling the economy out of recession and beating the path to sustained growth. The party would obviously want to argue that another four years in office in Abuja would enable it increase the pace of economic growth and reduce the level of domestic unemployment (officially put at 14 per cent, but generally agreed to be between 34 and 36 per cent for those between the ages of 18 and 45). For investors the APC’s lax fiscal spending in 2018 would nudge the stock market up a couple of steps and improve market yields as individual stocksbegin to rise further. How sustainable this price spiralwill be over the next few months is a different debate entirely. A lot would depend on the CBN’s response. A hawkish CBN bent on curbing inflation would tighten the money supply screws and raise local interest in an effort to rein in domestic price increases. This would slow down growth and knock unemployment out of the ball park. A dovish Central Bank, on the other hand, would accommodate fiscal expansion, increase money supply and lower domestic interest rates,thereby resulting in economic expansion and lower unemployment, especially with the economy a whole ten yards away from full employment in the short term (see box story). But this would, admittedly, come at the cost of higher than desired inflation rate. So what to do?

With unemployment ripping holes through society’s fragile fabric as reflectedin increased cases of kidnapping, prostitution, suicides and violent crimes, nailing growth to the cross of inflation may prove fatal. The fiscal and monetary authorities need to come to some sort of agreement on growth. With an armada of young Nigerians floating aimlessly in the labour market. The employment figures thrown up by the VP do not come out in the open on the streets. Nigeria graduates about a million people from various tertiary institutions annually, to give these people hope of meaningful jobs the economy needs to grow at a minimum of ten per cent per annum over the next decade. If this does not happen then many young Nigerians between the ages of 18 and 45 will be left behind to live a life that is, in the words of the 17th century thinker Thomas Hobbes, ‘nasty, brutish, and short’.

With population trotting at 3 per cent per annum and recent GDP growth pushing ahead at 1.4 per cent things look fairly bad for the economy as the nation’s dependency ratio (which refers to the ratio between the number of people with jobs and those who are not working) worsens on a yearly basis. Fitch, an international credit rating agency, in recentlyrevising its 2017 growth forecast for Nigeria downgraded itsprojections from 1.5 per cent to one per cent.Inflation rate has been sliding steadily throughout the year as the Godwin Emefiele-led central bank kept a tight lid on money supply and held policy rates up. Inflation rate has dropped from 18.72 per cent at the beginning of the year to 15.91 per cent in October. Analysts expect inflation rate for December to drop to 15.79 per cent.

So how have investors fared in 2017? They have held up pretty nicely. The Nigerian Stock Exchanges All Shares Index (ASI) has nosed past a three year high of 39,000.00 points. The ASI closed the previous week at 39, 257.53 this was down from a six-day bull run but it still offered one of the best year-to-date yields in the world, the ASI year-to-date yield currently sits at 45.08 per cent, compared to the Hong Kong Hang Seng’s year-to-date yield of 30.20 per cent, the South Africa Johannesburg Exchanges (JSE’s) yield of 14.50 per cent and the Dow Jones global Index yield of 19.60 per cent, the Nigerian Exchanges performance is stellar.

The NSE’s superior returns has attracted an open flood of foreign portfolio (equity investment) investors fueling a market frenzy. Adjusted for annual inflation rate the Nigerian market has offered a real return of 21.73 per cent so far in 2017. Whether this will continue in the New Year is a matter of debate as a lot will depend on the direction of monetary and fiscal policy in 2018, if inflation rises in the year real returns may get burned, but if the economy grows on fiscal expansion leading to a rise in consumer spending and manufacturing and consumer sales, better corporate earnings could pull equity prices up and raise stock prices even further. The balance appears to be in favour of fiscal expansion in 2018 as the government tries to stimulate growth before 2019 elections. The problem would be monetary policy which may remain unyieldingly stiff as the financial market regulator attempts to achieve single digit inflation rate by the end of the second quarter. This would be consistent with its objective of keeping inflation within a band between 6 and9 per cent per annum.

If international crude oil prices stay up between US $58 and $62 per barrel, Nigeria’s fiscal deficit would be more manageable and the government would be under less pressure to tighten fiscal spending and raiding banks for cash to finance the budget deficit. This would have beneficial effect on the private sector which would now be able to borrow money at lower interest rates. Lower finance charges and increased consumer spending would improve corporate operations and push up equity prices. As tough as the year 2017 has been for companies, the stock market has been generally bullish, send a strong message of the economies underlying resilience. Consumers may not have had so much money in their pockets and corporations may not have been able to grow profits at as fast apace as in previous years but looking back on the year, equity investors can raise their fists in defiance.


2017: Economic policies and their contradictions…investors nightmare

In 2017 a lot of the problems of government economic policy has been the irritating conflict between fiscal and monetary policy. While the treasury office has tried to stimulate growth through fiscal spending (budget deficit was about 2.4 per cent of GDP and debt service 45 per cent of revenue by December) monetary authorities have remained content at pinning down inflation (put officially at 15.91 per cent per annum). The implications of both policies are shown in the chart below:

Expansionary fiscal policy would shift spending to the right from IS0 to IS1, interest rate would fall from Ro to R1 and output and employment would shift from Y0 to Y1. But if interest rate is not allowed to fall (Emefiele at his stubborn best) fiscal policy would be ineffective, output would increase marginally in the short term but would quickly reverse asunemployment would stay the same. 2018 is Emefiele’s economy.
















Source: TeslimShitta-Bey, Business Hallmark



































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