Global outlook: Fresh struggle for Nigeria, other emerging markets

Oil price uncertainty unsettles advanced economies

The latest report on World Economic Outlook readjusted growth figures downwards. While this may be an affirmation that all is still not well with global economic activities, it also lays credence to the assumptions on the implications of international linkages through trade and interdependency of economies.
 
Specifically, global growth, once projected at 3.5 per cent in April 2015, is now estimated at 3.3 per cent, representing 0.2 per cent marginal decrease and as well, marginally lower than in 2014. The new report also see a gradual pickup in advanced economies and a slowdown in emerging market and developing economies, while in 2016, growth is expected to strengthen to 3.8 per cent.

Giving a reason for the backward review, the International Monetary Fund (IMF) noted that a setback to activity in the first quarter of 2015, mostly in North America, was to blame.

In advanced economies, growth has remained underlined by a gradual acceleration in economic activity in areas like easy financial conditions, more neutral fiscal policy, lower fuel prices, and improving confidence and labour market conditions, which is presently projected to be intact.
 
The irony of the advanced world’s growth is that it sometimes runs counter to those of the emerging and developing nations. For example, some of the major emerging and developing economies are producers of commodities, which are susceptible to vagaries- like international politics. The crude oil price misfortunes for the emerging economies have on the other hand, given the advanced economies growth edge.

Nigeria has been tagged alongside the emerging market economies, perhaps by population and assessed economic potential, though not yet realised, but faced with several economic challenges over the years, which are embodied in the growth limiting factors of the emerging markets- political and economic.

The ongoing negotiations between Iran and the United States of America with other Western economies, when it sails through, may have opened a new case against Nigeria- further decline in oil prices with more supplies from the country, thereby distorting the reserves accretion projections and foreign exchange earnings; and heightened speculations over the loss of market share in the Asian countries to Iran.

The National Bureau of Statistics (NBS), in its June report showed that growth momentum slowed to 3.8 per cent in the first quarter of 2015, relative to 6.2 per cent in the same period of 2014.

The headline inflation has persisted for the seventh consecutive month to 9.2 per cent in June 2015, from nine per cent in May, as a result of the pressure on supply-side cost arising from petroleum products scarcity and weaker Naira/dollar exchange rate.

Certainly, the developments continue to impact negatively on real returns on investments in the financial market, as analysts expect foreign exchange market issues to be placed on the front burner at the MPC meeting this week.

The recent foreign exchange policy has resulted in the widening of the exchange rate spread between the official and parallel markets (now 24.4 per cent or N48.05/$), which according to the Central Bank of Nigeria (CBN), was not unexpected, may have been adjudged as creating a fertile ground for round-tripping, currency arbitraging and speculations. Standard and Poor’s in its contribution, said the country cannot escape another round of devaluation.

Already, the Nigerian bourse had declined by 13.1 per cent as last week, since it reached its 2015 high of 35,728.12 points on April 2, 2015 and bond yields have also risen to 15.4 per cent as investors continue to price in foreign exchange devaluation risk on investment valuation.

The importers of the 41 items prohibited from the official foreign exchange window have persistently scrambled for the hard currency in the parallel market and consequently, the local unit had declined further by 1.7 per cent as at last week, but stable at CBN’s segment at N196.95/$.

Unless there is a situational change, given these indices, the country is sure to contribute significantly to the downward revision of the global economic outlook, starting from the sub-Saharan Africa’s estimation to the continent.
 
In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors. Though there is a projection of rebound in activity in a number of distressed economies, which would expectedly, result in a pickup in growth in 2016, the advanced economies are relatively immune to these factors listed above.
 
“The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth,” the IMF report said.
 
But with a rebound in oil prices, fuel end-user prices have started rising in advanced countries, which may mean a new round of economic woes for them because it portends high cost of production, trickling down to adjusted spending patterns by consumers and would ultimately hit the employment records. On the other hand, it is good for crude oil earnings’ dependent countries like Nigeria and other emerging/developing countries and can boost governments’ spending, leading to employments.
 
Further breakdown of the growth report showed that advanced economies’ share of the global projection would move from 1.8 per cent in 2014 to 2.1 per cent in 2015 and 2.4 per cent in 2016, which reflects a gradual step contrary to the April estimations, with the unexpected weakness in North America, regarded as a temporary setback, though the continent accounts for the lion’s share of the growth forecast revision in advanced economies.
 
The underlying drivers for acceleration in consumption and investment in the United States include wage growth, labor market conditions, easy financial conditions, lower fuel prices, and a strengthening housing market.

Contrarily, emerging and developing market economies struggle with wage growth and unfavourable labour laws, reel under low crude oil prices and uncertain financial condition and near non-existent housing market.

Growth in emerging market and developing economies is projected to slow from 4.6 percent in 2014 to 4.2 percent in 2015, broadly as expected, reflecting the dampening impact of lower commodity prices and tighter external financial conditions, particularly in Latin America and oil exporters, the rebalancing in China, and structural bottlenecks, as well as economic distress related to geopolitical factors- in the Commonwealth of Independent States and some countries in the Middle East and North Africa.
 
For the global financial institution, the projected pickup in global growth, while still expected, has not yet firmly materialized, hence the need to continue raising actual and potential output through a combination of demand support and structural reforms as the economic policy priority.

It also prescribed continued accommodative monetary policy for advanced economies, to support economic activity and lift inflation back to target.

“In a number of countries with fiscal space, the near-term fiscal stance should be eased, especially through increased infrastructure investment. In economies with high public debt, the pace of fiscal consolidation needs to strike an appropriate balance between debt reduction and imposing a drag on economic activity…

“In emerging market and developing economies, macroeconomic policy space to support demand is generally more limited, but should be used to the extent possible. In many of these economies, demand support should come from fiscal policy rebalancing aimed at boosting longer-run growth, through tax reform and spending reprioritization.

“In oil exporters, public spending should be adjusted to lower oil revenue where there is no fiscal space,” IMF statement added.

Analysts at Afrinvest Securities Limited, in a note to The Guardian at the weekend, said that the Monetary Policy Committee- the policy making arm of the Central Bank of Nigeria has tripartite options to tweak on in the immediate, as part of measures to steer the economy during the remaining period of the year.

The Head of Investment Research, Afrinvest, Ayodeji Eboh, in the prescriptions, inadvertently corroborated IMF’s prescriptions for managing the “whirlwind” for the emerging economies.

They were optimistic that the MPC meeting would leave all policy rates unchanged and continue to adopt administrative measures to curb the currency volatility, while rebuilding external reserves.

But followed on its ranking of policy choice, the securities company noted that it may also increase the naira intervention rate in the Interbank market, as well as raise Cash Reserve Requirements (CRR) to 35 per cent to reduce excess liquidity that could spur foreign exchange speculation.

The third option it listed was an increase in MPR by 50 basis points to attract Foreign Portfolio Investment (FPI), while subsequently loosening restrictions on foreign exchange trading.