Nigeria: Is A Recovery Ahead? – Barrons


By Johanna Bennett

Is the worst over for Nigeria’s economy?

The West African country is combating a recession brought on by the collapse of global oil prices. Adding to investor woes, uncertainty over President Muhammadu Buhari, who is on extended sick leave abroad, recently pushed the country’s already battered stock exchange to a nine-month low.

The Global X MSCI Nigeria ETF (NGE) has fallen 33% over the past 12 months.

William Jackson, a senior economist at Capital Economics, says that last week’s successful Eurobond issue is a sign that Africa’s largest oil-producing country is over the worst of the recent downturn. But, he warns not to expect a quick recovery.

All told, we see the economy returning to positive, but slow, GDP growth this year, of around 2.0%. If we’re right that would mean the economy would hardly recover last year’s lost output.

He goes into more detail:

…How quickly the economy can recover from here on, though, hinges on whether it has now fully adjusted to low oil prices.

On the plus side, the country has avoided a large widening of its current account deficit, as happened in many other oil-producing emerging markets. Nigeria’s external deficit stood at a modest 0.3% of GDP as of Q3 of last year, compared with a surplus averaging around 1.5% of GDP over the preceding five years.

However, the relatively small deterioration in the current account position was only possible because the economy fell into recession last year, which caused import demand to decline sharply. Imports of goods and services are down by 40% in US dollar terms from their 2014 level. That helped to mitigate the impact of the collapse in oil export revenues. Had imports stayed at their 2014 level, the external deficit would now be closer to 8% of GDP.

At the same time, the financial account has deteriorated. Non-residents’ investments into the country have declined, and these inflows are now outweighed by Nigerian residents’ purchases of foreign assets. As a result, the country suffers from net capital outflows. Current and financial account deficits forced the central bank to sell almost $6bn of from its reserves to plug the gap in the year to Q3 2016.

We think the balance of payments position will improve this year…Even so, we don’t envisage a strong economic recovery. Faster growth in domestic demand will lead to higher imports, causing the current account deficit to widen and requiring Nigeria to borrow more from abroad. It’s not clear that it would be able to attract much larger capital inflows. One way around this would be to devalue the naira, which would make Nigerian goods more competitive and Nigerian assets more attractive. However, for now policymakers appear to have no appetite for such a move.

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