By Lukman Otunuga
Prolonged periods of depressed oil prices have punished most oil export dependent countries in 2016 with Nigeria being no exception. When one factors in that the nation receives over 90% of export and 70% government revenues from oil which is currently struggling below $50 a barrel, it could be understood why the world’s second largest economy in Africa has entered a technical recession. This has been a rough year for the economy with the CBN taking action on various occasions from the Naira de-peg, to raising interest rates to record highs in a bid to reclaim some stability. Despite the attempts, unemployment still lingers around 13.3% while inflation skyrocketed to 17.6% in August consequently enforcing additional pressures on the nation already engaged in a painful battle with falling oil. It has become increasingly clear that Nigeria’s illness can be diagnosed as oil reliance, but the cure can be found in diversification.
The Naira continues to be exposed to downside risks as the terrible combination of oil price volatility and Dollars potential resurgence amid US rate hike expectations entices sellers to attack.
With sentiment towards the Nigerian economy still somewhat bearish in the shorter term, further declines could be expected in the local currency as the natural forces of supply and demand determine its equilibrium value. It should be kept in mind that the ongoing forex scarcity which continues to pressure the Naira has created a firm foundation for bears to install repeated rounds of selling. There exists a possibility of the Naira strengthening in the longer term but the currency remains heavily exposed to external risks in the short term. From a technical standpoint, the Naira is heavily bearish and this negative momentum could open a path towards 500 and potential higher against the Dollar on the black market exchange.
While the effects of the Naira floatation can be displayed with the sharp drop in currency value and rising inflation, this has also bolstered foreign investment towards the nation. Since the introduction of the flexible foreign exchange regime, almost $1 billion has entered the country from foreign direct investments with further inflows expected if the Naira continues to decline.
Market participants may focus on the pending inflation figures for September which could provide additional clarity over if the Central Bank of Nigeria takes further action in 2016. With the economy still under pressure, the CBN may be entangled in a three-way battle with attaining growth, curbing inflation while also retaining some credibility. There have been many discussions over the record high-interest rates of 14% repelling business to borrow consequently obstructing GDP growth, but with central bank caution remaining a recurrent theme, the CBN may be on standby before taking action in November or December.
Nigeria is in need of capital to boost its economy and this has sparked talks of the nation selling its national assets to calm investors, curb currency speculations and potentially stabilise growth. With the government receiving very little from depressed oil prices and the obstructions in the south depleting production even further, selling the assets could be a solution in the short term.
Many have been against the idea of relinquishing the assets and have labelled it as a quick fix which could leave the nation under further pressure in the longer term. With oil prices trading below $50 and the persistent uncertainty over the conflict in the south of Nigeria weighing on sentiment, this may be an unfavourable period to offload oil assets. When coupled with the state of the economy, the government could find itself in a position of weakness when selling potentially receiving a deal well below the true value.
The world’s second largest economy in Africa faces a dilemma between selling its national assets and borrowing externally to retrieve enough investments to jumpstart growth. It should be kept it mind that diversification and reinforcing infrastructure need capital which the nation does not possess consequently creating a situation where a decisive decision must be taken.
While Nigeria may be commended on its efforts to boosting foreign exchange investments via the floatation and tax reforms to bolstering government revenues, this is still far from the 15 billion needed to fuel its structural transition. The African Development Bank, IMF, and even China have all offered loans to help reinvigorate growth but it seems that the nation has decided to think things through before potentially taking action in 2017.
Despite the current gloom and doom, the longer term outlook for Nigeria still looks quite encouraging with the biggest challenge being how the nation weathers the uncertainty and external risks in the short term. With a population of over 180 million and fertile lands, agriculture could be the miracle pill which brings Nigeria back to health. Once the nation can feed its people, the surplus could be exported which could provide the revenues needed for the government to reinvest back into the economy.
If the infrastructure is reinforced then tourism could receive a welcome boost as safer roads magnetise tourists to the nation. Nigeria’s untapped maritime is a hidden gem that has been estimated to generate roughly N7 trillion annually if properly managed and could be one of the attributes which reflate the economy. The resources needed for Nigeria to steer away from oil dependence are present and the key may simply be proper management and time.
As Q4 commences, Nigeria may be slightly pressured if oil price volatility and a resurgent Dollar punishes the Naira further. Although OPEC shocked the global markets last week by deciding on an agreement to mitigate the oversupply woes, oil still remains somewhat pressured potentially trickling back to oil export nations. If the Federal Reserve decides to raise US interest rates in December then both the Naira and Oil could be vulnerable to heavy losses as bears install repeated rounds of selling. There could be an increasing focus on key domestic economic reports such as inflation, unemployment, and GDP for further clarity on how the Central Bank of Nigeria may jumpstart growth. This is a very critical time for Nigeria and although diversification is the key for the nation to transition away from oil dependence, many will be observing where the funding will come from.
–Otunuga is Research Analyst at FXTM.