As the political environment braces up for the 2019 general elections with campaigning and electioneering activities gaining momentum, concerns abound on the state of the economy and what needs be done to stimulate the growth most desired by the populace. Given the latest performance of the macroeconomic indicators, it is safe to assume that irrespective of who emerges as President, the task ahead remains employment creation, security, economic growth, amongst others.
Contrary to projections about the expected rate of economic growth in 2019, which include predictions of 2.0% and 2.2% by the IMF and World Bank respectively, we believe growth will be slower, nearing 1.75% in 2019. We expect that electioneering will dominate fiscal activities in the first half of the year, with significant policy activities resuming in the second half. Therefore, the true measure of economic growth will be dependent on the intensity of economic activities in the second half of the year. This would be predicated on a peaceful post-election environment,improved performance in the non-oil sectors and positive oil sector contribution
Other prospects of macro-economic importance for 2019 include:
Business and Regulatory Environment
We believe the business environment in 2019 will remaining challenging – following on from 2018. As highlighted earlier, we expect a slowdown in economic activities in H1 2019 due to election related uncertainties to also weigh on the industry with banks exercising significant restraint and due diligence on all cash transactions. We expect the regulatory environment to be firm, but supportive and more conciliatory in 2019 – in view of the need to manage
investor perceptions to supposedly harsh regulatory decisions and foster confidence in the economy.
Fiscal Environment and the 2019
With a targeted revenue of N6.97tn, the proposed budget for 2019, aptly dubbed ‘Budget of Continuity’, projects to spend N8.83tn during the year, resulting in a budget deficit of N1.85tn. Specifically, the budget proposes to generate N3.73tn in Oil Revenue, N1.39tn from non-oil sources and the balance N1.23tr from Other Revenue sources. Of the N8.83tn planned expenditure, N4.04tn was earmarked for Recurrent Expenditure, N2.03tn for Capital Expenditure and N2.14tn for Debt Servicing.
Given the recent fall in crude oil prices, and the noted challenges around the effectiveness of the government revenue machinery, we are concerned about the downside risks to a higher deficit. With the recent commitment to Nigerian Labour Congress (NLC) to implement the new minimum wage structure in 2019, there is a higher chance that government expenditure could rise above the projected level, thus widening the deficit.
The real GDP growth estimate of 3.01% appears aggressive considering the marginal growth recorded in 2018. Given that the official unemployment figures released by the NBS for Q3 2018 puts unemployment rate at 23.1% (Q3 2017;18.8%) which represents about 21 million unemployed
Nigerians and that the job creation statistics of the country does not suggest the likelihood of accelerated job creation within the next 12 months, achieving a GDP growth of 3.01% in 2019 may be an uphill task for the government.
It is likely that the National Assembly will pass a budget that incorporates the new minimum wage structure and adjust for lower oil price & production level estimates. It will however be interesting to see how these will be balanced with recent calls to reign in fiscal borrowing.
Oil Price & Production
With crude oil prices declining in the wake of concerns around excess crude oil supply and a slowdown in global economic growth, the Organization of Petroleum Exporting Countries (OPEC) and its allies agreed to cut global oil production by 1.2 mbpd in the first half of the year effective January 2019 in a bid to support crude oil prices in the near term. The new OPEC deal will see Nigeria cut its production by 3.15% to a cap of 1.685 mbpd (excluding Condensates), which puts total allowable production at between 1.885 mbpd and 2.035 mbpd after adjusting for estimated condensate production of between 200 kbpd and 350 kbpd. Overall we see a risk to the budget, which was projected on assumptions of US$60 pb oil price and 2.3 mpbd (including condensates) production level. To forestall future vandalization of oil installations, we expect the NNPC to replicate its recent surveillance contract with Ocean Marine Solutions (OMS) for the protection of the Trans Forcados Pipeline (TFP) to other installations.
The contract requires the security provider, OMS, to be responsible for repairs in the event of any damage to assigned installations. We believe this will go a long way in motivating effective surveillance and curbing pipeline vandalism in the Niger Delta.
Recent releases from the Debt Management Office (DMO) puts total public debt stock as at Sep, 30 2018 at N22.43 tn (US$73.2bn), consisting of N15.8tn Domestic Debt
(Federal and State governments) and N6.6tn External Debt (Federal and state governments). The data brings to the fore ongoing discussions about the sustainability of the government’s debt profile in the face of declining revenues.
The potential capacity to repay as highlighted by the debtto- GDP ratio of 19% has been questioned in many quarters as less important than debt-to-revenue of 65% which measures ability to the repay. Thus, while government debt is currently about 19% of national GDP, the cost of servicing
the debt is projected to be 24% of the 2019 budget and 30.7% of the planned revenue.
With the IMF and the lower legislative house expressing concerns about the level of debt and the challenge of significantly increasing its revenue streams, it becomes
imperative for some moderation to be introduced to the rate of debt accumulation. It is our opinion that irrespective of which measure you hold, the ability to accelerate revenue generation is an important barometer for debt servicing.
We are concerned that any planned deficit financing in 2019 will only balloon the debt profile, contributing to a further crowding out of the private sector, with attendant impact on economic growth.
Exchange Rate, External Reserves and Capital Inflow
In 2018, we had projected the possible convergence of some of the exchange rate benchmarks in existence at the time. In line with our expectations, the underlying rates for the NiFEX and NAFEX benchmarks did converge and remained within a marginal spread of each other. Thus, only the official CBN rate – which is used for FX transactions by the NNPC and the oil companies – remains below market at N305 – N307/US$1. Consequently, what used to be a multiple exchange rate regime is now more or less a tworate regime.
The CBN was able to sustain the currency in 2018 through its market intervention activities with available data suggesting that about US$48bn has been provided to the market through the CBN interventions. On the corollary, external reserves grew 13.3% in 2018, from US$38.1billion in Dec. 2017 to US$43.1billion in Dec
2018, though it rose as high as US$47.6billion in June 2018. Accretion to reserves was supported by proceeds from the Eurobond issuances in 2018, strong crude oil
receipts occasioned by the higher oil prices recorded in most of 2018 and positive capital flows recorded in the first half of 2018. According to the NBS, capital flows contracted 31.1% y/y and 48.5% q/q in Q3 2018, with outflows by portfolio investments, which accounted for 60% of capital flows, shrinking 38% y/y and 58% q/q. The reversal of capital flows was triggered by the effect of the U.S. FED monetary policy normalization actions and the strengthening of the U.S. markets.
In 2019, we expect that the CBN will sustain its interventions in the FX market in a bid to ensure that rates remain relatively stable into the elections and sustain its price stability objectives. While the OPEC production cap rules and lower oil price levels pose a downside risk to reserve accretion, we are optimistic of an improvement in capital flows on the back of a non-violent elections, stable exchange rate and attractive fixed income yields.
Monetary Policy – Interest Rate and Inflation
As a predominantly import dependent economy, any decline in the relative value of our currency will have a direct impact on the price level of goods and services. It therefore became imperative for the Monetary Policy Committee, and the Central Bank, to take necessary steps to maintain the value of the currency by sustaining a tight monetary policy environment. While this has been largely achieved, the impact of flooding on communities and farm lands, and
escalation of farmers-herders crisis had a negative impact on foods production and therefore food inflation.
In spite of ongoing activities to manage price stability, we expect inflation to rise during the year. The the recent convergence in exchange rates, the rise in food prices, new minimum wage and increased government and election related spending are expected to weigh on the general price levels over the near term. We expect headline inflation to come in at an average of 13.5% in 2019.
Going into 2019, we expect monetary policy to remain contractionary, given the overarching concerns of maintaining exchange rate stability. We expect that the
current monetary policy variables will be maintained in 2019, while Open Market Operations (OMO) by the CBN will be sustained. Presently, the CBN mops up all excess
liquidity from the banking system using issuances of short term securities to banks. It is our expectations that this situation will not change, rather might escalate if money supply within the banking system expands over the year.
We expect that short-term interest rates will rise to reflect the increased tightness in market liquidity, with implications for lending activities in the year and a slight rise in fixed income yields during the year to encourage the return of foreign portfolio investors and capital formation.
The 5-year term of the current CBN Governor, Godwin Emefiele ends in June 2019.
Given that he’s eligible to serve a second term, we expect that his re-appointment
or successor will be announced before the end of March 2019. A change in leadership at the Apex bank may have implications for the monetary policy direction of the
The frequency and stealth nature of the resurgent Boko Haram attacks may appear to have overshadowed the successes recorded by the army against the sect in the last
three or so years. In a related development, the herders – farmers crisis has also caused immeasurable destruction of lives and properties in the last 12 months.
Of grave Of grave concern however, is the allegation of collusion with the militia levelled against the Nigerian Army in the killings in Taraba & Benue states, and the accusations against top army commanders of arming Nigerian soldiers with obsolete weapons while enriching themselves with the funds meant for acquiring sophisticated weapons to fight insurgency.
These allegations are weighty and echoes the need to reform the security infrastructure of the country.
These reforms must be holistic and strategically flawless as the desired economic growth may not be attained if the security fabric of the country is perceived as largely inefficient.