Weak structure permits barrage of externalities threatening Nigeria’s economy – Experts
Increasing numbers of experts in the investment banking sector have stated that the nation’s productive position has been weaken, as many projected a rough economic ride into 2020.
Experts observed that recent developments in the global space has exposed weaknesses in the Nigeria’s economic structure as stakeholders call for necessary adjustment from monetary and fiscal authorities.
They chronicle that declining in global prices of oil exposed the faulty economic structure of the country.
Analysts noted that gross domestic product expands in line with pricing position of crude at international markets per period.
Pundits who spoke to MarketForces said the structure of the Nigeria’s economy is the sole factor that exposes the nation’s to barrage of externalities that is currently defining its performance.
“The nation’s gross domestic product thrives on high global prices of oil. However, performance swings depends largely on direction of the fluctuation in price and demand for Brent crude”, analysts stated.
MarketForces gathered from experts that except there is an alteration to the design of the Nigeria’s economy, revenues would always under-performed expectations.
Unfortunately, there is no strong economic plan or blueprint designed to achieve the much needed reform, experts said.
Before COVID-29 outbreak, and failed talk on production cut that slashed global prices of oil,Fitch Solutions had forecasted the Nigerian economy to grow at 2.1%.
At this level of projection, analysts considered that Fitch was bearish on the economy given the growth rate achieved in 2019.
In 2019, actual GDP growth rate came at 2.27%, albeit below average growth rate in population in the same period.
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FX market exposed to oil, external reserves position
Experts say the numbers are not looking good. Already, there is panic purchase of greenback as market expects another round of naira devaluation.
This cause exchange rate to spike above N400 to a dollar in the parallel market, though the CBN maintains stance on no devaluation.
On the external front, global prices of crude oil have plunged, the situation that is expected to impact negatively on oil dependent countries revenues.
Weaker fundamentals may force currency repricing in 2020
Investment bankers at Cardinalstone are of the view that the fundamental case for the naira is now materially weaker.
This, with twin deficits across current account and fiscal balances combining with higher inflation expectations to bolster the argument for a currency repricing.
“Clearly, Nigeria’s external buffers are lower, with reserves and excess crude accounts now at $36.2 billion and $71.0 million apiece compared to $62.0 billion and $20.0 billion, respectively, before the 2008 global economic crisis.
“This comes with significantly higher vulnerability to external shocks as foreign portfolio flows into the apex bank’s Open Market Operations.
“As OMO now constitutes about 32.7% of reserves amidst one of the worst oil market crises since the Gulf war of 1990/1991”, Cardinalstone held.
Last week however, the CBN technically devalued naira but claim it was a mere price adjustment as it sold to Banks at N380. €
Oil prices, Production Volume determine economic growth
Analysts at WSTC Securities held that on a broader note, there were indications of a relatively weaker contribution from the non-oil sector from 93% in 2018 to 91% in 2019.
“We believe that the decline in the contribution of the non-oil sector to total GDP was a resultant effect of weak macroeconomic environment, lack of effective fiscal stimulus and waning investors’ confidence in the economy”, WSTC analysts noted.
In its Africa Monitor report for April, Fitch Solutions reviewed forecasted on real GDP growth, said it will slow from a projected 2.1% in 2019 to 1.9% over both 2020 and 2021.
Trades, capital importation
The firm stated in the report that it expects constraints on oil exports and public investment to keep Nigeria’s real GDP growth relatively subdued.
This is expected to be below its average forecast for Sub-Saharan Africa regional growth of 2.9% over 2020 and 2021.
“Although measures aimed at bolstering private consumption and investment have been put in place over recent quarters, we expect their effectiveness to be hindered by rising inflation”, Fitch stated.
Fitch Solution relates that it expects constraints on oil output to see net exports weigh on Nigeria’s real GDP growth over the short term.
However, we anticipate growth of domestic output of crude oil, Nigeria’s main export and source of fiscal revenues, slowing from 2.8% in 2019 to 0.5% over both 2020 and 2021.
Nigeria will remain dependent on imports of consumer and capital goods due to its limited domestic agricultural and manufacturing productive capacity, while also making heavy use of foreign services.
Negative outlook
Fitch forecasted that Nigeria’s Current Account to Remain in Deficit over Coming Years. As such, the firm expects net exports to remain a drag on economic activity over the short term.
It added that capital formation growth will also remain limited over the coming quarters.
“Issues including infrastructure deficits and complex bureaucratic processes continue to deter much needed foreign investment, contributing to Nigeria’s low rank of 131st out of 190 countries in the World Bank’s Ease of Doing Business Index.
“We see limited scope for a major uptick in reform momentum to attract private investors to the oil and non-oil sectors over the short term”, Fitch Solution stated in the Africa Monitor.
According to the agency, it stated that little progress has been made on the wide reaching Petroleum Industry Bill.
To the firm, the government remains committed to policies such as the multiple exchange rate regime for the naira, while security risks in various parts of the country will also continue to weigh on sentiment towards Nigeria.
“We expect a slight increase in public investment over 2020, after delayed disbursements of funds saw government capital expenditure fall significantly short of the amount allocated in the 2019 budget.
“However, constrained oil revenues will limit the extent to which capital spending can grow”, it stated.
Fitch Solution stated that moreover, with a large public sector wage bill and rising debt servicing costs taking up much of the budget and facing upside risks, there remains potential for public investment to further fall short of expectations over the short term.
It recognised that measures aimed at bolstering private consumption and investment have been put in place over recent quarters.
“We expect their effectiveness to be hindered by rising inflation. Following a benchmark interest rate cut from 14.00% to 13.50% in March 2019, the CBN implemented a new minimum loan-to-deposit ratio of 65.0% for commercial banks, with a penalty for banks that fail to meet the threshold”, it held.
Inflation rate expands for 6 consecutive months
In the Fitch Solutions report, it stated that the CBN’s stimulus measures have begun to yield improved credit growth that is expected to provide tailwinds to demand over the coming quarters.
It also expects the increase to the national minimum wage currently being rolled out and planned increases to various public sector salaries to help buoy consumption.
But Nigeria’s inflation rate is fast rising, accelerated for six consecutive months from 11.02% in August 2019 to 12.20% in February 2020, well above the CBN’s single digit target.
Fitch said it expects ongoing violence in crop-producing regions weighing on food supplies, as well as restrictions on various imports amid limited domestic production, to contribute to inflation accelerating to an average of 12.4% in 2020 and 12.9% in 2021.
“Higher inflation will prevent the CBN from being able to further lower interest rates over the short term.
“While increasingly weighing on purchasing power and demand for credit, keeping overall real GDP growth subdued over the coming quarters.
“Risks to our Nigerian growth forecasts are weighted towards the downside”, the report reads.
Reliance on oil and exposure
Nigeria’s heavy reliance on crude oil exports leaves it highly exposed to fluctuations in global investor sentiment and oil prices, Fitch Solution said.
It stated that a negative oil price shock or unanticipated decline in domestic oil production would weigh on exports and fiscal revenues required for public investment.
Weak structure permits barrage of externalities threatening Nigeria’s economy – Experts
