By Nume Ekeghe
Nigeria’s researchÂ andÂ rating agency,Â Agusto &Â Co, has stressed the need for the federal government to address what it described as the â€œfiscal risks lurking in Nigeriaâ€™s deficit,â€Â projected at overÂ N3trillion in 2018 alone.
The firm noted that theÂ deficit which largely goesÂ intoÂ interest repayments (50%),Â salaries and pensions (63%) hadÂ led to Nigeria’s borrowing binge, pointing out that it was aÂ fiscal time bombÂ for the country.
Also,Â in the light of theÂ general election in 2019, Agusto & Co pointed out that that due to political risks, foreignÂ portfolio investors would re-evaluateÂ the countryâ€™sÂ risk to demand higher yields or there would be a panic sell-offs.
Â The firmÂ stated this in its 2018 economic newsletterÂ obtained recently.
It stated: “The election cycles in Nigeria lead to an inevitable elevation of political risks in the country.
â€œThese political risks tend to rise as the elections draw nearer leading to broad sell-offs by investors (particularly foreign portfolio investors).
“Thus, in the months to come (especially in the fourth quarter of the year), investors will possibly re-examine Nigeriaâ€™s risk profile and demand higher yields to reflect concerns over elevated political risks.
â€œThe current Kenyan narrative further dampens investor confidence in sub Saharan Africa.”
It further added: “To mitigate these risks, theÂ centralÂ bank needs to continue with its inflation targeting monetary policies.
â€œThus, easing in the first half of the year may be premature, as yield hunters will demand a premium for the higher political risks triggered by the election cycle.
â€œThe stability of the naira will also be a key driver of the carry trade. However, the fiscal deficit at overthree per centÂ of GrossÂ Domestic Product (GDP)Â and the uncertainty around the pricing policy on petrol will remain within investorsâ€™ radar leading to even greater uncertainty and further spiking macro risks.
Â “The current debt management strategy of the Federal Government of Nigeria (FGN) has been to rebalance the debt portfolio with higher exposures to foreign debt while cutting on local borrowings.
â€œThis has created some form of blip in the market as benchmark treasury yields on one-year maturities have dropped about 500 basis points from this time last year to between 13% – 14% now, and resulting in a negative real rate of return of about 1% – 2%.
â€œHowever, we believe that there will be some form of correction in the latter half of 2018 as yields will adjust to reflect risks levels from the macro and political environment.”
Also, while throwing more light on theÂ increasedÂ government borrowings and debt profile, it explained:Â “In the interim, the drop in yields opens a significant albeit short window of opportunity for issuers seeking to raise fixed income debts.
â€œWe do not consider the swapping of local debts for foreign debts as a sustainable long term strategy â€“ thus, our conviction that there will be some form of correction to reflect risk levels.â€
In addition, itÂ statedÂ thatÂ macro reforms especially deep structural reforms often requiredÂ heavy drawdown on political capital, saying suchÂ reforms if poorly communicated could result in significant political backlash especially in an election cycle.
It added: “Long-term followers of the Nigerian narrative understand the political cycle and its attendant effects on the macro-economic policy environment.
â€œHowever, the effects of having been averse to reforms especially in the 2017 window of opportunity being the midway point of this administrationâ€™s four-year tenure, implies that some tough reforms may be inevitable in this election cycle.
“The pricing of petrol is probably the most germane macro risk lurking in 2018. The current rhetoric from policy makers indicates thereâ€™s a conundrum on the petrol pricing issue.
â€œFailing to deregulate when oil prices fell below $40 a barrel was a big miss. But even failing to divest from the refineries in the early days of this administration was an even bigger miss, because tough decisions now have to be taken on these key issues at a less opportune time.”
Â It further stated:Â â€œNigeria will once again have to fritter away all the gains on the crude oil price rally if it fails to deregulate this time around.â€