Nigeria 2016: The Economy Crystal Ball By Tony Chinonso

Nigeria is currently overshadowed by negative developments in 2015 and many economists and financial analysts are projecting that 2016 may not easily shake off the impacts. An articulated review of 2015 economy and the 2016 forecast is presented here covering most key sectors by WSTC Financial Services Limited, a member of the Nigerian Stock Exchange, NSE, and a major operator in the Nigerian financial sector.
Oil Sector: Underlying weaknesses and uncertainties persist
Year-on-year, the oil sector expanded by a modest 1.06 per cent in Q3 2015, making it the first quarter of growth in the year. The growth in the oil sector was volume based as higher crude oil production was sufficient to offset the impact of weak oil prices during the quarter. Given an outlook of weak oil prices, the performance of the oil sector in the current year and in the near future will depend on the volume of oil production.
Further increase in production will depend on inflow of capital investments into the sector and this, to a large extent, depends on the resolution of the regulatory impasse in the sector (caused by non-passage of the Petroleum Industry Bill) and federal government’s commitment to its funding obligations with its joint venture partners.
Crude Oil: Supply overhang to continue price depression
The favorable crude oil prices of over 3 years till mid 2014 encouraged investments in the sector, while it also improved the production viability of crude from unconventional sources such as shale oil. This caused a steady upsurge in world crude oil production (even the OPEC consistently breached its set production quota of 30 mbpd) despite weaker global economic growth and crude demand. A result of this was a widening disequilibrium and supply overhang in the crude oil market which has continued to dampen prices.
The OPEC Reference basket (ORB) price averaged $49.56 per barrel in 2015, significantly down from $96.29 per barrel recorded in 2014. ORB bottomed at $30.74 per barrel while it peaked at $64.96 per barrel within the year. We believe crude oil prices will remain low in 2016 in the light of weaker demand for the commodity due to slow global growth, unabated crude oil supply surfeit and high inventory levels.
Non-oil sector: Widespread uncertainties to impede growth
On the contrary, growth rate of the non-oil sector continued its descent for the fourth consecutive quarter in Q3 2015 on account of the earlier-listed factors, particularly political and Forex uncertainties. The non-oil sector grew by 3.05 per cent in Q3 2015, compared to 7.51 per cent in Q3 2014. Growth faltered in all the major contributors to the non-oil sector in Q3 2015.
Given the current environment of low oil price and the significance of revenue from oil in government’s earnings, government’s earnings generating potential is expected to still be constrained in the early part of 2016, even as the non-oil sector continues to reel from low level of economic activity. The main task before the present administration will be to stimulate the economy and to tackle the perennial problem of the Boko Haram Islamic sect.
Business spending and overall confidence may still be hamstrung to a large extent in the first half, H1, of 2016 by slow decision making process of the government and central bank’s currency restrictions. Nevertheless, economic exigency will eventually overshadow political considerations regarding the appropriate pricing of the Naira, as we expect that the CBN will eventually shift grounds as regards Forex rate (although this may not crystallize until later in the year).
Ultimately, the rate of output growth will be determined to a large extent by the timing of currency liberalisation and the pace of government reforms.
Foreign Reserves: Depressed oil prices to precipitate further depletion
In tandem with the pressure on the local currency, the stock of foreign reserves declined in 2015 as the CBN continued to hold firmly to its grips on the value of the Naira after the devaluation in February. The nation’s stock of external reserves declined by 15.66 per cent to close the year at $29.07bn. Nigeria was not an outlier as weak oil prices also affected the level of foreign reserves in most of the OPEC member countries.
Although crash in oil prices and speculation against the Naira that ensued thereof formed the general theme upon which the depletion in reserves was anchored in 2015, the movement in reserves in each of the two halves of the year were, however, influenced by different factors. Alongside weak oil prices, the preponderance of socio-political risks associated with the general elections and uncertainty about the programme of the new government weakened confidence in the domestic economy and contributed significantly to the depletion in H1 2015.
With the successful completion of the general elections and handing over of power to a new government, a significant part of socio-political risks subsided. However, policy uncertainty soon replaced political uncertainty as general policy inertness of the new administration deterred foreign interests in the country. Given an outlook of low oil prices in the current year and the cap on attainable domestic production, we do not foresee any significant accretion to reserves in 2016.
Also, the CBN will continue to hold on to its resolve to defend the Naira at the expense of external reserves accretion. In the current situation in which the most significant source of foreign exchange earnings has been impaired by fundamental factors in the global oil market, the diversification of the source of forex earnings and aggressive import substitution remain the only sustainable option for reserves accretion.
However, given the structural requirements for attaining economic diversification and the time it takes to generate results, we expect that inflows from crude earnings will still remain the major contributor to reserves in 2016. We also believe that a downward adjustment of the domestic currency and liberalisation of the forex market will not only boost confidence in the local economy, but will also reduce the pressure on foreign reserves.
However, we note that devaluation will only provide an easy and quick respite to Forex depletion. We strongly believe that the provision of a market-friendly economic and socio-political environment will enhance inflow of foreign (direct and portfolio) capital and also foster the domiciliation of such inflows within the country.
Forex Market: Devaluation imminent
The CBN, in its bid to achieve its core mandate of price stability and to also align itself with the position of the government on the value of the Naira, remained resolute in pegging exchange rate amid the country’s worrisome preference for and dependence on imports. Unfortunately however, weaker-than-expected crude oil prices and the accompanying reduction in foreign exchange earnings have significantly raised the costs of defending the Naira (i.e. the pace at which Forex reserves is being depleted).
In 2016 we expect the CBN to continue to adopt restrictive measures in maintaining the value of the Naira at the current peg to the Dollar in the interbank segment of the Forex market. Nonetheless, we note that this approach is not sustainable in the mid-term given the outlook of weak crude oil prices and the implications of Forex controls on the domestic economy. Thus, we maintain that an official re-pricing of the Naira to a more market-reflective rate remains imminent.
Inflation: Supply side forces to stoke up pressure
Headline inflation rose from 8.00 per cent in December 2014 to 9.40 per cent in November 2015. The increase in the general price level amid slow down in aggregate spending indicates that inflation was basically driven by cost-push forces during the year. Principal among these forces include volatile exchange rate, high cost of credit (resulting from monetary tightening during most of the year), scarcity of petroleum products and increase in electricity tariff on non- residential consumers.
In addition, the lingering northern security crisis equally took its toll on food supply from the region, thus impacting negatively on food prices during the year. We expect the government to pursue some economic policies that will have inflationary implications in its bid to revive economic growth. Thus, we expect the implementation of expansionary fiscal plans and the CBN’s monetary easing stance to stoke inflationary pressures in the current year.

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