…as improvements in the oil sector raise fresh hope for the naira

By FELIX OLOYEDE

The jury is already out to give their projections about the Nigerian economy for the year, having ‘looked at their crystal balls’. They were unanimous in their forecast that the country’s economy would uptick but in a slow pace, which would be fuelled by higher oil revenue and more drive to cut down budget deficit through the implementation of the increase in Value Added Tax (VAT) to 7.5 per cent from the previous 5 per cent.

Economic analysts project that the economy may record 2.1-2.5 per cent this year. The new optimism derives from the positive performance of oil price in recent time. Crude oil prices staying at above the $55 per barrel benchmark for the 2020 budget would be one of the impetuses the Nigerian economy needs to grow this year.

And the elevated tension between the U.S. and Iran over the killing of Iranian General Qasem Soleimani by a U.S. drone strike in Iraq has raised expectation for higher oil price this year. Oil prices reached three months high of $69.50 penultimate week after the announcement of General Soleimani’s murder. This development is good news to the Nigerian government which has projected 2.04 million output at $55 for the year.

The country would also hope that Asian economies would continue grow above the projected 5.1 per cent growth forecast by the International Monetary Fund (IMF) for the region, so that there would be higher demand for its oil as India currently top the list of buyers of Nigerian crude.

Analysts from United Capital, led by the investment firm’s Head of Research, Mr. Wale Olusi, believe the government has come out with a well-intended framework, but plagued by slightly uncoordinated policy outline, which would limit economic growth to above 2.3 per cent but below 3 per cent.

They hinged their forecast on “the recent amendment of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) 1993 Act and the on-going reviews of the Tax Acts via the finance bill, which will support the implementation of the 2020 Budget and beyond in the face of sharp rising debt profile.”

They asserted that the unprecedented early passage of the 2020 budget by the senate in December 2019, to return the economy to a January to December budget cycle from January 1, 2020 and a lower yield environment, triggered by the Central Bank of Nigeria’s (CBN) recent mix of heterodox policy actions, which will help ease the cost of rolling over government borrowings and stimulate domestic private sector investment, are positive developments that would drive economic growth this year.

However, analysts from GTI Securities, led by Damilare Asimiyu, submitted that Nigerian economic growth would be remain weak and settle around 2.1-2.4 per cent, because of “unaligned fiscal and monetary policy focus, and over-dependent on crude oil as the main source of foreign exchange.”

They expect the government to be more prudent by capturing its agencies in the IPPS and TSA and re-open land borders before end of the first quarter of the year to avoid losing out on African Continental Free Trade Area (AfCFTA) opportunities. The AfCFTA which has been signed by all the 55 African Union (AU) member states except Eritrea, is aimed at increasing intra-continental trade in Africa.

Fitch, a global credit rating agency, in its Nigerian economic review for 2020, posits that unless the federal government tinkered with its economic policies, the country’s economic would continue to be vulnerable to shocks and the government projected 2.93 per cent Gross Domestic Product (GDP) growth rate may be a mere mirage.

The agency believes Nigeria’s economy will continue to slow down until 2021, hovering around 2.4 per cent. This is would have adverse impact on investors’ confidence, which would hamper capital inflow into the country, thereby, constraining economic growth.

Nigerian Inflation RateAlthough the government expects inflation to moderate to 10.81 per cent in 2020, The global credit rating agency maintained that Nigerians would spend more to purchase less this year, “as several unconventional policies being implemented by the government will continue to drive prices high in the economy.”

It explained that inflation would be accelerated by some of the recent policies of the government such as the 66.7 per cent hike of the minimum wage to N30,000; increase of Value Added Tax (VAT) to 7.5 per cent, as well as the recent closure of  the country’s land borders and tightening restrictions on foreign exchange financing for a wide range of imports.This is in tandem with the projections of GTI Securities and United Capital that inflation rate would berth at 12 per cent and 11.9 per cent respectively.

There is hope that the equity market which posted -14.60 per cent loss last year would turn corner and return positive at the end of 2020. Analysts at United Capital have projected the Nigerian bourse to post 5.3 per cent return at the end of the year, while those at GTI Securities  believe equity market would witness modest recovery, on the back of low yields in the fixed income market, dissipation of political risk, and expectation of improved budgetimplementation.

However, Fitch queried the CBN decision to offer high yields to foreign investors at low cost and restrict local investors in its short-term Open Market Operations (OMO) bills in order to attract portfolio investments. It believes this would be counter-productive, as it would lower OMO market liquidity due to a narrower range of participants, and this will dampen net portfolio inflows.

Consequently, the Naira would likely take a hit, as the drop in portfolio inflow due to CBN’s restriction in OMO market, would put pressure on the local currency. But if the crisis between U.S.-Iran, which has pushed oil price up by 4 per cent within four days to $68.91 on January, escalate further and shoots oil price up, the apex bank would be in a better positioned to continue to defend the Naira.

Meanwhile, should oil price drop below $55, which is Federal Government’s benchmark in the 2020 budget, the CBN may be forced to release the lever on the Naira and allow it to weaken. GTI Securities’ analysts even envisage that the apex bank may be forced to add more items to its forex restriction list.

“On the exchange rate and capital flows, we expect the CBN to continue to support the naira at N360-N365/$1 levels, by selling OMO bills to FPIs (Foreign Portfolio Investors) as a strategy to preserve the reserves at decent levels. At the current run rate, this can be sustained for another 7 to 9 months, all things being equal.

Nevertheless, we acknowledge the growing concern about an impending devaluation of the naira,” analysts at United Capital submitted. They believe currency devaluation is unlikely in the immediate-term, but there is a possibility for the harmonization of the official rate from N305.5/$1 to something very close to the I&E window rate of N360.0/$1, in the medium term.

Teslim Shitta-bey, Managing Editor, Proshare, a financial information hub, reasoned that if oil prices drop below $55, the CBN would have to continue to employ unconventional instruments in defending the Naira, and this is would further accelerate inflation.

He argued that external factors that would dictate the direction the Nigerian economy would swing to in 2020, but this would be clearer at the end of the first quarter. He noted that the renewed revenue generation drive of the Federal Government would help increase the country’s tax-to-revenue rate and cut down budget deficit.

His submission was that this year, the country’s economy would only see a moderate growth.

Dr. Adi Bongo, Faculty Member, Lagos Business School, opined that the economy may surpass the projections of many analysts, as the CBN Purchasing Managers’ Index (PMI) climbed to 60.8 in December 2019 from 59.3 in the prior month, indicating that productivity increased the fastest in the factories since December the precious year.

Manufacturers are now beginning to take advantage of technology and supply-chain management to reduce their costs. This is impacting on their margin positively and we are beginning to see adjustments in consumer spending,” he explained.

He also mentioned that the social intervention programme of the government and injection of funds by the apex man into different sectors of the economy and improved trade policies, are beginning to take effect, which also spur economic growth.

“This year we may not expect something to happen, because the January to December budget cycle just started this year, this effect may not be significant.”

Dr. Bongo argued that the closure of the country’s land border was a blessing, as more than 90 per cent of imported goods to some African countries find their ways into Nigeria, depriving Nigerians job opportunities. He projected that Nigerian economy would likely grow 2.5 per cent this and expand faster in subsequent years as the government continues to engage in infrastructural development.