Anxiety over economy as oil, naira crises persist

A sense of anxiety has gripped the Nigerian economy with concerns elevated over slowing growth as the combination of depressed oil prices and Naira vulnerability weighed heavily on investor sentiment.

For a currency strategist and Research Analyst, FXTM, Lukman Otunuga, “this has been a rough year for not only Nigeria, but for many commodity dependent economies that have collectively surrendered $40 billion in capital outflows due to the persistent global uncertainties.”

Of course, Nigeria, now the second largest economy in Africa, after a stint at the top spot, has been in continuous battle of economic survival, following the slump in oil revenues that presently seems unending. The development eroded public finances and stoked pressure on the Naira, as foreign exchange becomes scarce.

With slowing domestic growth, weakening global growth and inflated debt levels, all enforcing downside risks on a nation that is already entangled in a fierce battle with falling oil prices, the current quest for economic recovery tends towards Herculean task.

According to the analyst, Nigeria’s sickness may be diagnosed as the prolonged periods of low oil prices that have not only heavily eroded government earning, but also diminished confidence towards the health of its domestic economy.

A few reality check showed that the oil sector provides 70 per cent of government revenues and a whooping 95 per cent of export revenues, which is a big chunk of overall Gross Domestic Product (GDP).

But hope has recently dimmed with the renewed militancy in the Niger Delta, as on crude oil production has depressed even through 2017, hence the nation must act swiftly to finding the cure, which is non-other than diversification.

“Even without the drop in Nigeria’s oil production, the ongoing concerns over the excessive oversupply of oil in the global markets could ensure oil remains depressed for an extended period consequently punishing oil dependent nations further. The shock of falling oil may be the wake-up call Nigeria needed to start steering away from being heavy oil-reliant,” Otunuga said.

Speaking on the state of the market as traders await the “flurry” of economic data on today, a financial analyst, Femi Ademola, said that sentiments are what one cannot determine accurately.

“Especially in a market condition like Nigeria’s economy now, perceptions can easily swing an investors decision in a moment. But generally, anyone with cash is the ultimate king, because good deals can just spring up from anywhere.

The President of Time Economics, Dr. Ogho Okiti, in his economy brief, said that there has been a significant jump in borrowing cost across all segments of bank borrowers, with Small and Medium Enterprises being the worst hit, as they are often considered to be high risk borrowers and ill-equipped to deal with the current sharp slowdown in the level of economic activities in the country, considering their nature.

“Higher interest rates negatively affects economic agents and this is easily amplified in an economy like Nigeria where output has been negative amid low business confidence and bleak economic outlook in the near term.

“The current lack of investment outlets, supported by near term poor growth prospects will likely push unemployment to record levels by the third of the year. Though oil production increased to 1.7 million barrels per day from the dramatic low of 800,000 bpd in early June, only about 55 per cent of government’s projected revenue in the 2016 budget was realised in the first half of the year.

“This was compounded by weak tax and customs revenues. Weak tax and customs revenues follow the pass through effects from low oil prices and general weak economic conditions,” he added.

The nation’s external reserves declined to new low of $25.78 billion this month, following the decision of Central Bank of Nigeria (CBN) to set up dollar sales in an effort to boost interbank liquidity.

Nigeria’s foreign reserves have already lost over $2 billion this year with fears of further declines as the central bank attempts to support the vulnerable Naira. There may still be some hope for the nation to reclaim back lost volumes in reserves in the future, but this revolves around diversification and reinforcing infrastructure at the moment.

The Naira vulnerability has been a recurrent theme following the official floatation in June, which saw the local currency depreciate almost 40 per cent against the dollar. The toxic mixture of weak oil prices and persistent concerns over lacklustre economic growth has created a platform for bearish investors to continually attack the Naira on both the official and black market exchange.

“Sentiment remains bearish towards the local currency with further declines expected as the natural forces of supply and demand determine an equilibrium price level. With the forex scarcity persistently enforcing downside pressures on the Naira, bears may have been offered an opportunity to install repeated rounds of selling on the currency.

It has become common knowledge that the extended periods of depressed oil prices have eroded Nigeria’s GDP growth for 2016 with the current yearly forecast standing around 1.8 per cent. With first quarter GDP growth painting an undesirable picture, investors are now directing their attention towards second quarter GDP, expectedly today, which could provide some clarity on how the nation is faring in a period of global instability.

“If the second quarter GDP figure today fails to meet expectations, then concerns may heighten over the nation entering a recession. Reports have already circulated over Nigeria relinquishing its positions as the largest nation in Africa to South Africa, which dented sentiment further.

“Although both countries have had a record drop in GDP, Nigeria’s painful Naira decline was the main factor, which forced it to surrender its title as the largest economy in Africa. While this is indeed a heavy blow in the short term, it should be kept in mind that steps have already been taken to jumpstart economic growth with optimism still present over the country grasping back its lost title,” Otunuga said.

Naira’s persistent decline, which caused the prices of food and non-food products to sharply rise, is still threatening the economy more and trigger further rise in inflation to projected 17.35 per cent.

In June the nation’s inflation level already spiked to an eleven year high as the mixture of Naira weakness and persistent concerns over the health economy eroded purchasing power. Although inflation in Nigeria continues to spiral to worrying levels, the long-term perspective, such as an increase in foreign investments from a weak Naira could elevate Nigeria’s growth, while also improving sentiment.

The CBN has already shocked the global markets by raising interest rates to the 14 per cent all-time highs in an effort to curb inflation and its negative rate gap, but could take further action in the future to attain economic stability.

“Nigeria’s current woes remain oil reliance and the cure is diversification, which could not only steer the nation from being heavily impacted by external shocks, but also spur economic growth.

“Diversification is a topic that continues to reverberate across the corners of the nation with effort heavily taken to reinvigorate agriculture, reinforce infrastructure and expand taxation to bolster government revenues, which in turn could uplift economic growth.

“It is better late than never and the CBN has already received a wake-up call with the Naira floatation and removal of restrictive foreign exchange policies potentially attracting foreign investors back into the nation. Nigeria is to allocate N60 billion  more spending on capital projects as part of the 2016 budget, while deals are already in place in China, which will be of great benefit to both nations,” the currency expert said.

For a successful diversification in Nigeria, real focus should be placed on core areas like infrastructure, manufacturing, technology, and healthcare to break away from the curse of heavy oil reliance.

The country is globally acknowledged to a youthful population ready for productive activity, while the land is fertile for agriculture.

A faculty member at the Lagos Business School, Dr. Austin Nweze, once told The Guardian that if the country can produce 70 per cent of what it consumes, its development would come naturally, as external shocks would be moderated.

While the food security would lead to increased export profile, the surplus produce exported will not only save costs on foreign exchange, but create revenue for the economy.

The manufacturing sector is still waiting for improved infrastructure to revive inbuilt potential to create additional income for the nation. Self-sufficiency in power generation is another key area, which will be critical in bolstering technology and even healthcare.

From the outcome of the reports today, the rest of 2016 and onwards may present a monumental challenge for Nigeria as it battles not only falling oil prices, but global instabilities and its already state of disrepair, which positioned it to major downside risks.

“The post-Brexit threats and persistent uncertainty may sour investor risk sentiment, while fluctuating expectations over the Fed raising US rates this year could ripple back to Nigeria, consequently impacting the Naira.

“Everything revolves around maintaining economic growth and currency stability, which may ultimately entice foreign investors ultimately elevating the nation further.
“Diversification is paramount and although this will be a long-term transition, the key steps have already been put in place. Although there is the risk of prolonged periods of slow growth as Nigeria steers away from being oil export nation, the successful outcome could be one, which defies all expectations,” Otunuga added.