How Nigeria will maintain resilience against the ‘storm’
Confidence towards the Nigerian economy received a welcome boost following reports of the country reclaiming its position as the largest economy in Africa.
According to the International Monetary Fund (IMF), Nigeria’s GDP currently stood around $415.08 billion in October while South Africa at $280.36 billion, sparking discussions on the nation’s stand against the ‘economic storm’.
Although the release was seen as a breath of fresh air, it must be kept in mind that Nigeria is still entangled in a painful battle with depressed oil prices, while ongoing concerns over faltering domestic growth weigh on sentiment.
External risks such as a resurgent dollar amid renewed United States’ rate hike expectations have pressured the Naira, with the local currency currently trading around N460 on the black market exchange as of writing.
Oil’s volatility and rising rate hike expectations enticed bearish investors to send the Naira to the lows of N475 against the Dollar in early October before prices staged a remarkable rebound towards N450.
With the Naira’s value being dictated by external risks in the shorter term, the current rebound in value may be the product of oil’s resurgence amid renewed hopes of a potential Oil Producing and Exporting Countries (OPEC) freeze deal.
WTI Oil currently hovers above $50, a value, which is supportive of Nigeria that receives over 90% of its export revenues, and 70% of its government revenues from oil prices.
If oil continues to trade higher and OPEC surprise the markets with a freeze deal, the world’s largest economy in Africa could be elevated as rising oil revenues would help plug the budget deficit.
Looking at the economic data, Nigeria’s inflation floated towards 17.9 per cent in September its highest figure in eleven years consequently highlighting the pressures faced since the NBS stated that the country stumbled into a technical recession.
Although the figure was somewhat painful, the visible slowdown from August’s 17.6% level displayed the impacts of the record 14% interest rates set by the Central Bank of Nigeria.
It seems that the CBN is on a quest to quelling inflation while attracting Foreign Direct Investments (FDI) via high-interest rates and although it may be early to gauge the impacts, the early results look encouraging.
The main theme in Nigeria revolves around the government finding solutions to fund its budget, which could help the nation steer away from the curse of oil reliance.
President Muhammadu Buhari has tabled a budget of N6.06 trillion for 2016, but the shortfall continues to spark debates over selling key assets to plug the deficit. While selling the national assets may offer a solution in the short term, the long-term losses of potentially relinquishing the goods at below cost value could place the nation under further pressure.
With Nigeria displaying resilience despite the persistent talks of a recession, nations such as China and America have come forward to offer a helping hand.
Chinese investors have already signed an agreement to boost the Nigerian economy with digital television, information communication in focus, while the U.S has pledged to increase FDI in Nigeria.
Despite the short-term gloom and doom, the global economy remains optimistic over the future of Nigeria’s economy once diversification builds momentum.
For instance, PwC’s research indicates that the nation could reach $1.4 trillion by 2030 making it a super power that could shake the globe. The first steps to this great journey remain critical with everything revolving around diversification and finding the right methods of funding.
When discussing diversification, the blueprints have already been published, with agriculture acting as the goose that lays the golden eggs. With a population hovering around 180 million and set to grow exponentially with years, agriculture could be a key attribute, which sparks economic stability.
Once any nation has the ability to feed itself, the surplus may be exported globally, which could provide additional government revenues that are reinvested back into the nation. Other major sectors in Nigeria such as maritime, tourism, technology and manufacturing all have the ability to generate untold results once the infrastructure is reinforced.
The complicated jigsaw puzzle on how to stabilise the Nigerian economy will slowly become solvable by the day with pieces such as diversification, funding and improving economic data provide investors the clarity needed to fill the gaps.
When falling oil prices punished the nation, the main focus revolved around diversification, but this has shifted to the budget deficit and solutions for funding.
Nigeria plans to sell a Eurobond worth $1 billion before the end of the year and if this is successful, it could bolster sentiment towards the Nigerian economy as the first steps are taken to plug it’s N2.2 trillion budget deficit.
• Otunuga is a currency and research analyst at Cyprus-based FXTM