The limits of 2017 optimism

While the shakeup at the Financial Reporting Council is the biggest surprise of 2017 so far, I must admit that the wave of optimism that seems to be everywhere is a close second. Considering the doom and gloom with which we ended 2016, I did not expect us to be on the sunny side of life this quickly. Those must have been some amazing crossover services that Nigerians went to. Who knows maybe all we need for 2017 to be better than 2016 is a rush of animal spirits. However, just in case more than that is required, let’s take a look at the things that need to go right for 2017 to be the year of restoration and be significantly better than 2016.

Everybody and their gateman know the first requirement for a better 2017. Oil prices need to remain above $55 per barrel for most of the year. Is it right that we are so dependent on the price of oil – probably not – but it is what it is. With the oil price currently hovering around $55, it is possible that this most fervent of wishes could be granted. However with the need for the OPEC cuts to hold, and shale to not be too disruptive, and robust global economic growth – it looks like a lot of things have to go right for the $55 to be sustained but we will continue to hope because we have no choice.

However it will not be good for all our prayers to work and then we will then fall our own hands. So we must ensure that we meet our budget target of 2.2 million barrels of oil daily average production. Since we’re currently at around 1.8 million barrels per day, we better hope that the work being done to engage the Niger Delta Avengers and the other militant groups will actually succeed.

Can you imagine us finally solving the Joint Venture funding issue, having the right oil price and finally being tripped up by inadequate production volumes? We will need to avoid such in 2017 if we are to meet our objectives.

In the event that both the oil price and our production volumes hold up the government revenues will increase and our state governments will be able to pay salaries again and the civil service which remains the engine of growth in a lot of the smaller states can help in restarting those economies. If those economies restart then some of the unrest that has plagued our country for the last twelve months may start to subside. And who knows maybe the Nigerian military can reduce the number of states they are active in from pretty much all of them to a more manageable number.

The optimists are even expecting that these increased revenues could mean that the federal government and the CBN may even be willing to do something the issues affecting the naira dollar exchange rate. In theory, the increased revenue will give the federal government and the CBN the ability to loosen the restraints on the naira. However given our historically pegging it is highly likely that doing so will lead to slight additional devaluation say to about N330 to N350. Given the focus on 2019 and the need to not rock the boat it’s safe to say that won’t happen. The optimists in this case are hoping that the revenue will increase enough for the CBN to unban the 41 items and be able to settle demand. Otherwise our optimism will wane and it will be very hard for the economy to return to robust levels of growth.

Another key limiting factor is power. After all it is hard to see the optimists being right if we do not have power. Well the Minister of Power has recently announced that the transmission grid can wheel 7,500MW. For our economy to be truly jumpstarted we need to see significant progress in transmission as a whole. For the last few years we have struggled to generate, transmit and distribute 4,000MW. We have even had moments when we’ve dropped below 1,000MW. What that means is that the system has been teetering for a while. The inability of the transmission company to increase the capacity of the grid has been one of the largest limiting factors. If the Minister’s proclamation holds, then it is possible the power sector companies may actually be in a better position in 2017.

It the power companies get more power, they are probably better able to pay their debts. If they are better able to pay their debts, the banking system is less under threat of bad loans. If the banking sector is less under threat of bad loans we are likely to escape an AMCON 2. If there is no AMCON 2 that means that no bank is in danger of failing and we are better off as a nation.

There you have it. The things that need to go right for 2017 to be significantly better than 2016. They don’t seem like a lot – oil price, oil production, security, foreign exchange, power. However the first is outside our general control, and the others require strong decisions from our federal and state governments. This is not to say that these things can’t happen, but it seems like a very thin reed to base all our 2017 hopes on.

I find that there’s an assumption that 2016 was a difficult year and therefore 2017 must be better by fire or by force.

Unfortunately, there is no guarantee of this. The experiences of Venezuela and Zimbabwe tell us that things can continue to get worse if the right decisions are not taken. So, by all means be optimistic about 2017, however just remember that there needs to be action to turn the hopes for 2017 into reality.

Happy New Year!