Economic Red Flags

A review of recent economic data in relation to Nigeria presents a weak picture across indices-policy, output, oil and commodity prices, inflation, investment, manufacturing performance, monetary policy, employment and global conditions. The delay in appointing an economic team and presenting a coherent economic policy direction has had severe economic costs-a precipitous decline in GDP growth rate and capital markets; increase in unemployment; pressure on the currency and a rash of unintelligent FX policies resulting in expulsion from the JP Morgan Bond Index; as well as a dry up of foreign direct and portfolio investment.

According to the National Bureau of Statistics (NBS), Nigerian real GDP growth dropped to 2.35% in Q2 2015, from 3.96% in Q1 averaging 3.15% year to date. In Q2 oil sector output declined by 6.79% while the non-oil sectors collectively grew by 3.46% producing overall economic growth of 2.35% for the quarter. This compares very unfavourably with Q2 2014 growth of 6.54% evidencing drastic downturn in economic activity. Prospects of a rebound are limited due to uncertain policy outlook, low oil prices and a looming shut-out of FDI.  Nigerian manufacturing is in recession with declines of 0.7% and 3.82% in Q1 and Q2 2015 respectively, with policy developments regarding FX worsening sector outlook. As moderator of a Lagos Chamber of Commerce and Industry (LCCI) seminar on recent FX guidelines on July 9, 2015, I asked the CBN Director of Monetary Policy, Moses Tule and his colleagues what impact they anticipated their policies would have on output, employment and inflation. They had no clear answer and I don’t recall any intelligent response beyond appeals to patriotism and some platitudes that sounded more like a politician’s waffle than the thoughts of an economist or monetary policy theorist. It seems the chickens are coming home to roost even faster than I could have imagined.

Within manufacturing, the falling sub-sectors include oil refining (-64.54%); food, beverages and tobacco (-5.9%); textile, apparel and footwear (-3.17%); electrical and electronics (-0.38%); motor vehicles and assembly (-0.48%); and other manufacturing (-6.40%). In addition to manufacturing, other poorly-performing economic sectors include oil and gas, electricity, hotels and restaurants (accommodation and food services) and public administration.

All major macroeconomic indices are trending negative! Inflation has reached 9.3% in August and rising; FX markets remain under pressure-in spite of de facto fixed IFEM rates around N200/$ while a 1980s/1990s phenomenon of differing rates for FX cash (N223/$) versus “transfers” (N236/$) has returned to parallel markets signaling regressive policy; capital markets are in freefall as investors panic based on policy vacuums and misdirected policy. The expulsion of Nigeria from the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) has worsened the outlook for both bond and equity markets, as well as FDI, as equity investors wonder if a similar exit from the MSCI Frontier Index is not inevitable. After the JP Morgan announcement on September 8, NSE market capitalisation fell by N311bn (2.98%) on September 9 and all Nigerian stocks in MSCI declined by 3%. FDI in Q2 stayed at Q1 levels failing to produce any post-election bounce.

Real sector and macroeconomic conditions are reflecting in jobs figures as NBS data show under-employment rising to 18.3% (13.5 million people) and unemployment to 8.2% in Q2 2015 from 16.6% and 7.5% respectively in Q1. There are now 19.6 million people either unemployed or underemployed in Q2 2015 compared with 17.7 million in Q1. Anecdotal and industry information suggests these figures will rise further in Q3 2015. Only 141,368 jobs were created in Q2 2015, a 69.9% (469,079) reduction from the preceding quarter and 45.5% lower than Q2 2014.

Meanwhile in the global economy, crude oil price volatility increased significantly in August, with OPEC and Brent Crude oil prices showing a monthly price change of 16.1% and 15.9% respectively. OPEC Basket and Brent Crude oil prices currently stand at $45.38 and $48.88 as at September 8, 2015. This third month consecutive decline in prices reflects concerns about lower economic growth in emerging markets, expectations of higher oil exports from Iran, and continuing growth in global inventories. EIA forecasts that Brent crude oil prices will average $54/b in 2015 and $59/b in 2016, unchanged from last month’s STEO. Forecast West Texas Intermediate (WTI) crude oil prices in 2015 and 2016 average $5/b lower than the Brent price. On the other hand, Goldman Sachs released a report September 11, 2015 titled, “The New Oil Order-Making Sense of an Industry’s Transformation” recalling how the US went from importing 50% of its oil requirement in 2006 to becoming the world’s largest producer of natural gas ; how the shale revolution has altered the global energy landscape; and speculated that oil prices could fall as low as $20 per barrel due to persisting surplus production which suggests prices may “remain lower for longer” before markets could be rebalanced. The report noted substantial potential for even larger increases in global oil output due to Iranian re-entry though predicting “it’s going to take time”. For countries, the outlook is for a large redistribution of income from producer nations (such as Nigeria) to consumer nations while the industry may see between $700bn-$1.3trillion of projects shut-in, due to shale oil offsetting the need for several complex deep-water projects.

The Nigerian economy exhibits recessionary conditions with Q2 2015 growth approaching one-third of the level just one year earlier. The slide to an actual recession may still be averted with a strong economic team and sound policy. The manufacturing sector is particularly challenged due to dependence on imported inputs and weakening purchasing power. The rapid implementation of the Treasury Single Account will affect monetary conditions and raise interest rates. We may expect the MPC to adopt a monetary easing posture and reduce banking sector CRR. Given current circumstances and the outlook for oil prices, currency devaluation may now be inevitable. The question is when FGN/CBN throws in the towel or if strong policy may yet eliminate the need for devaluation.

Opeyemi Agbaje