Report: Uncertainties over General Election Constraining Businesses


By Nume Ekeghe and Chris Uba

A new report by Guaranty Trust Bank Plc has predicted that the business environment will remain challenging this year due to uncertainties around the upcoming general election.

As a result of this, the report titled, ‘Macroeconomic and Banking Sector Themes 2019,’ said there would be slowdown in economic activities in the first half of the year.

The report, which was obtained yesterday, projected that the anticipated election related uncertainties would also weigh on the banking 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,” the bank said in the nine-page report.

With regards to the 2019 budget, the report noted that 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.”

In addition, it pointed out that with the recent commitment to Nigeria Labour Congress (NLC) by the federal government to implement the new minimum wage structure in 2019, there was a higher chance that government expenditure could rise above the projected level, thus widening the deficit.

Furthermore, it noted that the real Gross Domestic Product growth estimate of 3.01 per cent appears aggressive considering the marginal growth recorded in 2018.

“The new OPEC deal will see Nigeria cut its production by 3.15 per cent to a cap of 1.685 million barrels per day (bpd), 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$60pb oil price and 2.3 mpbd (including condensates) production level.

“To forestall future vandalisation 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,” it stated.

Commenting on Nigeria’s rising debt profile, the report noted that the potential capacity of the country to repay as highlighted by its debt-to-GDP ratio of 19 per cent has been questioned in many quarters, as less important than debt-to-revenue of 65 per cent, which measures ability to the repay.

Therefore, it stressed that while government debt is currently about 19 per cent of national Gross Domestic Product (GDP), the cost of servicing the debt had been projected to be 24 per cent of the 2019 budget and 30.7 per cent of the planned revenue.

“With the International Monetary Fund 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.

“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.

“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,” it added.

The report noted that the impact of flooding on communities and farmlands, and escalation of farmers-herders crisis had a negative impact on foods production and therefore food inflation.

It, however, anticipated higher inflation this year.

“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 per cent 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.

“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.