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1/13/2018

ON A FIRM FOOTING NIGERIA ENDS 2017

ON A FIRM FOOTING NIGERIA ENDS 2017
It has certainly been a phenomenal and somewhat pivotal year for the Nigerian economy which managed to climb out of its first recession in 25 years, during the second quarter of 2017.

The unsavory combination of heavily depressed oil prices, reduced foreign reserves, and a vulnerable Naira in 2016, initially fuelled speculations of the nation’s macroeconomic conditions remaining depressed for a prolonged period. However, the status of Nigeria’s economy did a pleasant turn around this year as core macro-economic indicators started to rebound. The recession made it increasingly clear that the illness behind Nigeria’s economic woes was a heavy dependence on oil as a source of growth, but the cure could be found in diversification.
As Nigeria continues its quest to break away from the shackles of oil reliance by diversifying into other sustainable sources of growth in the longer term, recovering oil prices could still offer some benefits short term. With the government’s revenues still dependent on the oil sector, the performance of oil in 2018 will have an impact on the economy. Although supply-side disruptions and market optimism over OPEC’s production cuts balancing markets, have elevated WTI Crude to its highest level in over two years at $60, the question remains for how long?
With rising production from U.S. Shale seen as a threat to higher oil prices, the upside is likely to face some headwinds. Depreciating oil prices amid renewed oversupply concerns could easily trickle down to negatively impact the Nigerian economy. Another risk to look for next year, is the possibility of OPEC formally requesting Nigeria to limit production by 1.8 million barrels a day- like the other oil producers. With the 2018 budget based on oil production of 2.3 million barrels per day, this presents some headwinds to the successful implementation process of the budget, and could negatively impact the economy as a result.
Focusing on the macro fundamentals, the picture is encouraging, as inflationary pressures eased considerably from the peak of 18.72% to 15.90% in November 2017. Exports followed a positive trajectory in 2017 which was supportive of GDP potential, while imports cooled as the nation consumed local produce. With Nigeria’s economic resilience stimulating investor risk appetite, the Nigerian Stock Exchange ventured higher; appreciating 41% year to date. Due to improving business confidence in the country, the manufacturing PMI also rebounded significantly this year, indicating an expansion in the manufacturing sector. In the most recent publication of the World Bank’s report on the ease of doing business, Nigeria’s ranking was pushed up by 24 places, underscoring the more promising economic outlook.
The Central Bank of Nigeria may be commended for its efforts to help stabilize the chaotic forex market this year by introducing an importers and exporters foreign exchange window. With the window increasing the ease for investors to trade the Dollar, the Naira – which dropped to as low as N525 to the Dollar- staged a recovery, with prices trading around 365 as of writing. As we enter the New Year it is vital that Nigeria puts more effort into creating a stable and unified exchange rate across the forex markets. It must be kept in mind that a liquid forex market combined with increased investment in other sources of growth such as agriculture, has the ability to tame inflationary pressures. When inflation displays further signs of moderation, the Central Bank of Nigeria is likely to take action by cutting interest rates from 14% to 12% in an effort to support economic growth further.
While the Central Bank of Nigeria is expected to cut interest rates in 2018 as inflationary pressures ease and the economy stabilizes further, attention should be paid to external factors. For example, with the Federal Reserve raising U.S. interest rates in December and the Bank of England potentially hiking rates in the near term to cap inflation, there is a possibility the CBN remains on standby during Q1.

As we enter the New Year, I remain highly optimistic over Nigeria’s long-term economic outlook but much work needs to be done in the short to medium term.  The nation remains in need of urgent macroeconomic and structural reforms, not only to support the current recovery but to place it on a path of sustainable growth. With the IMF forecasting real GDP growth of 2.1% and the Federal Government targeting 3.5% in the 2018 budget, it will be interesting to see if the nation under or over performs in 2018.
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