Nigeria: Cautious Economic Outlook As Politics Weigh, By Rafiq Raji
Investors are understandably taking precautions. Ecobank’s Nonyane shares insights from her observations of the markets and note-sharing with clients: “From a financial market perspective, we have certainly seen investors being a lot more conservative with risk taking on NGN assets over the past six months on the back of the rising political risk.”
A man walking, albeit all too slowly, and hitherto virtually paralysed, would be greeted with joy by well-meaning friends. As expectations are raised afterwards, a tinge of disappointment welcomes less than expected progress. Surely, he should be able to walk briskly by now, some would wonder aloud. This is perhaps a fitting allegory of the Nigerian economy at the moment. Incidentally, it is also characteristic of its many contradictions. With wealth palpably abundant, from oil and gas to numerous other natural resources of note, most Nigerians are poor. And there are lots of them who would argue that even when the economy was booming at above 5 per cent levels some years back, their lives during today’s supposedly sluggish times are not much different from what it was back then. Out of a five-quarter recession since Q2-2017, growth remains sluggish. Most recently, in Q2-2018, real GDP growth was 1.5 per cent from almost 2 per cent in the first quarter of the year; a slowdown. It was a little heartening, of course, that the main driver of growth in the second quarter was the non-oil sector, which rose by 2 per cent year-on-year, thus helping to fill some of the gap that an almost 4 per cent contraction in the oil sector GDP created. With elections due in a couple of months, and the consequent slowdown that tends to ensue, as investment decisions are delayed or postponed till afterwards, hopes are down on any significant revival. Add to that the recently forced resignation of former finance minister Kemi Adeosun over a certificate forgery scandal in September, and you might be forgiven for being so dour.
Officials would probably take comfort in the fact that the prospects of another recession are relatively slim. South Africa was not so lucky, entering into a recession in Q2-2018. Still, but for unnecessary and avoidable holdups, there certainly should have been more spring in the steps of the Nigerian economy by now. The central government’s N9.1 trillion ($29.8 billion) budget, after a half a billion naira increase by legislators, was not passed until May, for instance – well into the year, and about seven months after it was submitted in November for legislative approval by President Muhammadu Buhari. And now, a request for virement of some components of the budget to ensure proper funding of the upcoming elections has become a source of tensions. Why? Mr. Buhari proposes that funds hitherto allocated for the constitutency projects of federal legislators should, instead, now be used to fund the polls. And with the president of the Nigerian Senate now aiming to unseat the incumbent at the State House as arrowhead of his party’s campaign and many of his colleagues looking to become governors or retain their seats, there is little chance of much governance till after the polls. Naturally, the economy would likely be a casaulty. In July, the International Monetary Fund (IMF) put it succinctly: “Under current policies, the outlook remains challenging…[Thus] a coherent set of policies to reduce vulnerabilities and increase growth remains urgent.” But how likely are the chances of that with the 2019 polls at the top-of-mind of policymakers? Two leading Africa economists were asked for their views.
Real GDP growth should be closer to 3 per cent in 2019, according to Ecobank; from about 2 per cent estimated by the IMF for 2018. This is below potential, for sure. Thus, if growth is to be restored to pre-crisis levels of 5-6 per cent, reforms would have to be deepened, Ms. Nonyane avers.
Better Growth On Reforms
Gaimin Nonyane, head of economic research at Ecobank, a pan-African bank, in London says, “the outlook is for a stronger recovery despite the recent slowdown seen in Q2-2018.” But if that is the case, why is the economy still sluggish? “The slowdown in Q2 real GDP growth was owing mainly to challenges in two key pipelines (Trans-forcados and Nembe Creek) in May 2018, security challenges in major agricultural belts in North-East and North-Central regions, slower-than-expected recovery of the trade sector and administrative inertia in implementing structural reforms,” says Ecobank’s Nonyane. “With efforts to resolve the technical difficulties in the pipelines underway, we expect the oil sector to move back into positive territory in the coming quarters (barring any major disruptions to foreign oil installations), while the non-oil sector will continue to drive growth driven by strengthening activity in the utilities, construction, ICT and transport sectors,” she adds. The authorities’ ambitious spending plans also underpin relative optimism about growth. Real GDP growth should be closer to 3 per cent in 2019, according to Ecobank; from about 2 per cent estimated by the IMF for 2018. This is below potential, for sure. Thus, if growth is to be restored to pre-crisis levels of 5-6 per cent, reforms would have to be deepened, Ms. Nonyane avers. The probability of major policy actions in this regard during an election season already in high gear is quite slim, however.
Cautious Markets Due To Political Uncertainty
Investors are understandably taking precautions. Ecobank’s Nonyane shares insights from her observations of the markets and note-sharing with clients: “From a financial market perspective, we have certainly seen investors being a lot more conservative with risk taking on NGN assets over the past six months on the back of the rising political risk.” Andrew Nevin, chief economist at PwC, a consultancy, in Lagos agrees: “Investors are obviously slowing down as we head into a complex election season. Outsiders certainly cannot be expected to understand all the players and issues, and this election is highly uncertain. In this environment, they will prefer to wait. In addition, high profile incidents that put regulators and major players in conflict will also cause investors to be cautious.” There is already evidence of this. “The Nigerian equity market is currently amongst the worst performing in the world in local currency terms, indicating that beyond the EM/FM risk aversion, there is an element of political risk in the pricing of Nigerian equities,” says Ecobank’s Nonyane. “Furthermore, portfolio inflows via the IE Window dropped to a one year low in August (USD546m), just a third of the monthly average over Q1 2018 (USD1.6bn), [with] FDI inflow [falling] to a 13-month low in July (USD11.4m) and [setting] a new record low in August (USD8.7m),” Nonyane adds. Ecobank’s head of economic reseach believes “investors are also cautious, partly due to…[the] absence of policy reforms, which has subdued the outlook for growth.”
Rafiq Raji, a writer and researcher, is based in Lagos, Nigeria. Twitter: @DrRafiqRaji
An edited version was published by New African magazine in October 2018.