Download The State of the Nigerian Economy

Review of Recent Economic and
Financial Developments
Afolabi E. Olowookere, Ph.D.
Presented at the 3rd Capital Market Committee Meeting, Federal Palace Hotel, Lagos on 24th November, 2016
Outline of Presentation
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Global Economy
Oil Price and Production
Output and Growth
Prices and Employment
Money Market
Stock Market
Fiscal Position
External Trade and Finance
Determining Factors Going Forward
The Global Economy
 Global economic growth has been sluggish but steady.
 The IMF (Oct. 2016) reviewed global growth downwards by 0.1% due to
 Low growth outlook for advanced economies following Brexit
 Weak growth in the US
 US Presidential election – future uncertain
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Mr. Trump’s pledge to move the economy sent the US stock market up
Trade restrictions – could damage the economy
Trigger the rise of nationalism
Oil?
 In UK, the full impact of Brexit is still uncertain
 It is still not clear whether UK will leave the European single market or negotiate
associate membership
 Awaiting Supreme Court judgment on the role of Parliament in the negotiation
The Global Economy (IMF, WEO-Oct.)
Region/Country
2014
2015
2016
2017
World
Advanced Economies
Euro Area
EMs and Developing
Sub-Saharan Africa
3.40
1.90
0.90
4.60
5.10
3.20
2.10
2.00
4.00
3.40
3.10
1.60
1.70
4.20
1.40
3.40
1.80
1.50
4.60
2.90
United States
United Kingdom
2.40
3.10
2.60
2.20
1.60
1.80
2.20
1.10
China
India
Brazil
South Africa
7.30
7.20
0.10
1.60
6.90
7.60
-3.80
1.30
6.60
7.60
-3.30
0.10
6.20
7.60
0.50
0.08
Nigeria
6.30
2.70
-1.70
0.60
 US rates will likely be increased in December expected due to improved growth prospects.
 China growth relatively stable due to policies
implemented to support growth
 Brazil still in recession but with expectations of less
economic, political and policy uncertainty
 India continues a strong recovery largely due to
effective policy actions
 Lower growth for SSA due to the sharp
slowdown in some of the largest economies in
the region
 In Nigeria, the challenges remain:
 foreign currency shortages due to lower oil
receipts,
 low power generation
 weak investor confidence
Trend of Bonny Light Price
140
120
100
80
60
40
20
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
0
Nigeria Oil Production
2,500
2,000
1,500
1,000
500
Sep-16
May-16
Jan-16
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
0
 Price of Bonny Light averaged $50.83 in Oct. 2016
 An increase of 67.2% this year
 Average price still gives room to support budget ($38pb)
 But for lowered production
 Weak global demand and excess supply have dampened
growth
 Nigeria production averaged 1,628bpd in October, 2016
(OPEC)
 11.9% lower than 1,848bpd in January 2016
 Other sources put production as lower
 Lower production due to pipeline vandalism and lack of
new investment in sector
• Nigeria exiting JV cash call arrangement likely to be
beneficial
 Nigeria exempted from production cuts agreed by OPEC
 But, there is still uncertainty about the possibility of
the OPEC production cut working
 Nigeria moved into a deeper recession
with growth in Q3’16 at -2.24
The industrial sector contracted the
most (-12.21%)
 Largely due to contraction in Crude
Petroleum and Natural Gas subsector (-22.01%)
 Cement (-6.26%), Food, Beverage
and Tobacco (-5.75%) and many
other manufacturing activities also
contributed
 The service sector, which is contributes
50.24% of the country’s GDP, also
contracted by -1.17%.
 Agriculture sector however grew by
4.54%
 Only the Fishing component
contracted by -5.59%
 Back to the farms!
2015
2016
Sector Growth
rates (%)
Q1
Q2
Q3
Q4
Total
Q1
Q2
Q3
Agriculture
4.7
3.49
3.46
3.48
3.72
3.09
4.53
4.54
Industry
-2.53
-3.31
-0.13
-3.04
-2.24
-5.49
-9.53
-12.2
Services
7.04
4.67
3.97
3.69
4.78
0.8
-1.25
-1.17
Real Growth
Rate
3.96
2.35
2.84
2.11
2.79
-0.36
-2.06
-2.24
Real Non-Oil
Growth Rate
5.59
3.46
3.05
3.14
3.75
-0.18
-0.38
0.03
Prices and Employment
Inflation
16.5
17.9
17.1
13.7
18.3
17.6
11.4
Unemployment (%)
15.6
Oct-16
19.3
13.3
2016:Q2
Sep-16
Jul-16
Aug-16
19.1
12.1
2016:Q1
Jun-16
May-16
10.4
2015:Q4
18.7
Apr-16
Mar-16
17.4
9.9
2015:Q3
Feb-16
Jan-16
8.2
2015:Q2
18.3
Dec-15
Oct-15
Nov-15
16.6
7.5
2015:Q1
Sep-15
Aug-15
6.4
2014:Q4
17.9
Jul-15
Jun-15
15.4
9.7
2014:Q3
May-15
Apr-15
17.7
7.4
2014:Q2
Mar-15
Feb-15
7.8
Jan-15
9.6
9.4
12.8
2014:Q1
17.5
9.3
9.4
9.2
9
8.5
8.2
9.3
9.2
8.7
8.4
9.6
Underemployment (%)
 Nigeria inflation increased to 18.3% in October,
recording the 9th consecutive month of rise in
prices
 Increases were recorded in most of the
key divisions that make up the CPI
 Major increase recorded in the food and
core sub-indices
 High energy prices and imported inflation
 The rise highlights the macroeconomic
uncertainty and high cost of living in the
country
 Unemployment, underemployment have also
risen to 13.3% and 19.3% respectively.
 Thus, proportion of Nigeria’s labour force
working for less than 20hrs a week is
32.6%
Money Market
Monthly Average rates- FMDQ
35.0
30.0
30.0
31.3
25.0
20.8
19.3
20.0
17.0
15.5
13.8
15.0
12.3
11.5
12.6
 Short-term interest rates are on the rise
 Average OBB rate rose from 2.1% in January to
30.0% in October
 During the same period, O/N rate rose from
2.6% to 31.3%. Implications:
o High cost of borrowing (govt. and private)
o High returns on financial investment
o Preference for fixed income instrument
o But with high inflation, real return low
10.0
6.0 6.5
5.0
6.4 6.9
4.4 4.9
2.1 2.6 2.3 2.7
0.0
Jan
Feb
Mar
Apr
May
OBB(%)
Jun
O/N(%)
Jul
Aug
Sep
Oct
 MPC maintained the existing monetary policy, leaving
the MPR rate at 14%
implying:
 Preference for price stability over growth
 Trade-off between domestic and foreign
investment
 Need for complementary fiscal policy
Stock Market
11,740
33,920
11,240
31,920
29,920
Points
10,240
9,740
27,920
9,240
25,920
8,740
23,920
8,240
Market Capitalization(N'bn)
All-Share Index
Billion Naira
10,740
 The All-Share Index stood at 27,220.09 points at the end of
October 2016
 Fell from 28,335.40 recorded in September.
 Gained 18.48% from January
 Lost 6.71% compared to October 2015
 Market capitalization for the same period was N9.4trn
 ASI closed at 25,517 yesterday
 Market Cap of N8.8tn
 Q3 corporate earnings was insipid
 Challenging economic environment
 Investors negative sentiment
 Low foreign inflow
 Introduction of Infrastructure Bonds can also deepen
market
 NSIA, Infracredit, Guarantco, PENCOM, SEC
Fiscal Position
516.0
SEP-16
455.0
510.2
443.6
559.0
305.1
280.9
297.8
336.2
360.0
407.5
360.4
459.7
 Low FACC contributes to States’
 Inability to pay salaries
 Reduced purchasing power
AUG-16
FAAC ALLOCATION (N’B)
 FACC in October fell to N455bn; N559bn was attained in June
 Vandalism and maintenance costs
 Oil price fluctuations
 Low economic activities
Retained Revenue (N’b)
Expenditure (N’b)
Overall Balance (N’b)
Q1-15
Q2-15
Q3-15
Q4-15
Q1-16
Q2-16
Q3-16
1,027.0
1,156.6
-129.5
538.6
1,024.5
-485.9
1,044.8
1,190.3
-145.5
808.5
1,544.3
-735.8
505.1
1,230.3
-725.2
677.9
1,136 .9
-659.1
934.52
1,235.5
-301.0
OCT-16
JUL-16
JUN-16
MAY-16
APR-16
MAR-16
FEB-16
JAN-16
 Estimated deficit of N1,090.96 billion
 98.8% higher than the budgeted for 9 months
DEC-15
OCT-15
 Expenditure was N1,235.5 billion
 19.6% positive variance this year
NOV-15
 Federal Government retained revenue in Q3’16 was N934.5
billion
 So far 25.7% negative variance this year
24.5
24
OCT-16
JUN-16
Jun-16
SEP-16
MAY-16
May-16
25.4
27.1
APR-16
Apr-16
AUG-16
27.9
MAR-16
26.21
27.8
FEB-16
JUL-16
28.2
JAN-16
26.4
29.1
DEC-15
26.4
29.9
NOV-15
30.2
OCT-15
30.3
SEP-15
31.3
29
JUN-15
AUG-15
29.6
MAY-15
31.5
29.5
APR-15
JUL-15
29.8
MAR-15
31.4
FEB-15
JAN-15
34.3
EXTERNAL RESERVES ($'BN)
EXCHANGE RATE (N/USD)
600
500
400
300
200
100
Official
Parallel
Oct-16
Sep-16
Aug-16
Jul-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
0
 Nigeria’s current account has been in the negative since Q4’2015
 Stood at –N141.7bn in Q1’16
 EIU is projecting current account deficit of –N1,576bn and –N1,607bn for
2016 and 2017 respectively
 Nigeria’s external reserve as at the end of October stood at $23.95bn.
 Lost 14.9% from January 2016 and 20.5% from October 2015
 Dwindling reserves attributed to Nigeria’s inability to meet its crude oil
production target
 There is about 54% premium between the official (305/$) and parallel
(470/$) exchange rates
 Market segmentation caused by:
 Demand higher than supply
 Delayed policy response
 Speculation and uncertainty
 Efforts to equalise rates
 Increased weekly supply to BDCs from $30,000 to $50,000
 $7.9bn intervention at the interbank foreign exchange market
 Road shows to attract foreign investor
 Maintaining MPR at 14%
 Investor are cautious
 CBN independence
 Policy inconsistency
 Foreign exchange risk
 Poor domestic investment climate
Determining Factors Going Forward
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Militancy and insurgency
Corruption fight
Fiscal stance of States
Competitiveness
Investments (Domestic and
Foreign)
 Infrastructure
 Elections – e.g. Edo, Ondo
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Oil price
Tax base and rates
Infrastructure
Public Debt
Interest rate
Exchange rate
Thank you