Nigeria: An Economic Upswing Foretold

Oil prices have rebounded from their recent lows and may yet provide temporary relief to Nigeria, allowing the incoming administration of President-elect Muhammadu Buhari to forego some of the proposed budget cuts or, alternatively, increase capital expenditure. Though market watchers widely expect oil prices to remain weak for the foreseeable future, Nigeria’s economy for now boasts enough resilience to keep its annual growth rate at five to six percent – a clip most other countries would find positively dizzying.

Still, lower than expected oil revenues will, in all likelihood, necessitate an increase in government lending. However, with public debt hovering around 12% of GDP, the country should have some financial wiggle room. Nigeria’s poor B+ credit rating, recently downgraded by Standard & Poor’s and now four notches beneath investment grade, will make that a fairly expensive proposition. Already now, the government needs to earmark 9% of its revenue for interest payments.

President-elect Buhari has his work cut out and expectations run high. Mr Buhari promised to tackle the endemic corruption holding back the country’s advancement and said his administration will address the chronic shortfall in infrastructure development as well, starting with upgrading the strained power grid.

“Nobody doubts the resolve of the incoming president,” says Tola Odukoya, managing-director of Dunn Loren Merrifield Asset Management and Research. Mr Odukoya notes that expectations are high: “There is a palpable sense of optimism bordering on euphoria now that the elections are over and an orderly transfer of power is in the making. However, those in the know realise that the new administration must tackle a number of difficult issues and cannot run away from tough austerity measures.”

“Nobody doubts the resolve of the incoming president.”

– Tola Odukoya

Mr Odukoya mentions the fuel subsidies: “These must end. We will be much better off without them as they encourage corruption. However, most Nigerians will want to keep the subsidies in place.” Mr Odukoya also emphasises that President-elect Buhari must find ways to work with the National Assembly and the powerful state governors who may fight any future austerity drive. “State governors enjoy vast constitutional powers and will likely oppose any attempt at reducing the flow of federal funds to which they are entitled. Mr Buhari is now no longer a dictator and will need to impose his administration’s policies without the use of strong-arm tactics.”

Whereas Africa’s largest economy does not lack in either ambition or potential, structural deficiencies are blocking an economic breakout. International investors, until recently quite bullish on Nigeria, are pulling up stakes and, as they move their billions elsewhere, dragging the stock exchange down. Though a post-election rally recouped some of the losses, the All Share Index is still close to 21% down from its July 2014 high.

Meanwhile, inflation inched up to 8.4% and may move into double-digit territory before long. At investment bank Merrill Lynch, analysts predict inflation may reach 15% by year’s end. Governor Godwin Emefiele of the Central Bank of Nigeria had to make a U-turn on interest rates driving the prime lending rate up to 16.7% in an attempt to halt the naira’s vertiginous drop – over the past six months, the currency lost 18% of its value against the US dollar.

According to Dare Fajimolu, chief economist and head of research at Marina Securities, the key is the new administration’s ability to pool its resources and cash-in on the upbeat mood now prevalent throughout the country: “the tense pre-election atmosphere has now relaxed. It was extremely important that the outcome of the vote was not contested which allowed the stage to be set for a smooth transition of power. With the political risk gone, the wait is on for new policies to be announced.”

Mr Fajimolu stresses that the Buhari Administration will need to act fast and start delivering on its campaign promises soon: “The tone will be set in the first two months and by July we should already have a clear picture of where the new government will be heading and how it aims to get there.”

Meanwhile, investor interest is picking up. “The markets have rallied and wiped out earlier losses. Confidence is returning as well with investors turning to equities. The market is still undervalued and presents a number of good buying opportunities, not least because of the weakened naira.”

Mr Fajimolu has already noted increased interest amongst both FDI (foreign direct investment) and portfolio investors: “I fully expect this trend to continue as the new administration unfolds its policies in the months ahead. I’ll be looking in particular to the Buhari government’s fiscal policy in order to see if the emphasis will lie on tax raises, expenditure cuts, or a combination of the two. I’m encouraged by the fact that President-elect Buhari has chosen widely respected technocrats and academic experts to help trace the vectors of future policy initiatives. This bodes well for Nigeria.”

However, Nigeria’s prospects for sustained growth remain excellent. The country’s budding non-oil sector is consistently outperforming the overall GDP with annual increases averaging well over seven percent. According to the African Development Bank (ADB), agriculture and trade and services are underpinning the economic diversification drive. In its annual African Economic Outlook Report, the bank is particularly optimistic about the positive effects that the reform of the energy sector is to have on the country.

“The reform of the power sector will boost both industrial activity and crop production, helping Nigeria fully implement its Agricultural Transformation Agenda – one of the main drivers of the non-oil sector.” The ADB report notes that improved crop yields will facilitate Nigeria’s ascendancy up the value chain, enabling food processing industries to prosper and nudge informal businesses into the economic mainstream. The bank concludes that notwithstanding its many challenges, Nigeria continues to lift millions out of poverty with real GDP per capita growth averaging four percent annually since 2010.

With a current account surplus of five percent (2015) and continued GDP growth of around seven percent for this year, Nigeria’s outstanding issues are, at the very least, manageable. The election of Mr Buhari, a smooth and violence-free process that received lavish international praise, has ended months of inactivity and stalling. In fact, days after the election the stock market registered its single biggest gain in a few years, jumping 8.3% in a sign that the economy just itches for an immediate take-off.

Since the late-March election, bond yields have come down and discount rates eased up while the naira remained stable. Wle Abe of the Financial Market Dealers Association said that the successful execution of the electoral process offers ample proof that Nigeria is a safe destination for investments: “Those who have been waiting on the side lines will perhaps wait a bit to see the new policies taking shape before jumping back in.”

Mr Abe said that most investors became jittery in the lead-up to the election: “Political uncertainty before the vote, as well as the sharp fall in the global price of oil triggering a devaluation of the naira in November, played their part. Now that a new business-minded government is about to assume power, things will undoubtedly soon improve, allowing Nigeria’s economy to reassert its commitment to accelerated growth.”