Recession or recovery?

In January 2016, the IMF projected that Nigeria’s economy would grow by 4.1percent! By April, the Fund reduced that projection to 2.3%, and in their recent July 2016 World Economic Outlook Update the IMF’s turnaround in its view about the direction of the Nigerian economy was complete, as it projected a contraction by 1.8%! By June 2016, the World Bank had also become pessimistic-reducing its growth projection to just 0.8%. Oil prices have been the main driver of recessionary trends augmented from the last quarter of 2014 by political risk considerations and loud noises about large sums of money missing from the nation’s treasury! After the 2015 elections went surprisingly well, poor economic performance became not just about oil, but governance gaps, policy uncertainties and outright wrong policy choices. Now political risks are rising again-in the Niger-Delta affecting oil output and power generation; continued though relatively reduced instability in the North-East as a result of Boko Haram activity; terrorism across large swathes of North-Central Nigeria, affecting agricultural output and resulting in numerous deaths; in Eastern Nigeria as security officers mow down unarmed pro-secessionist protesters; and as insensitive federal appointments heighten calls for restructuring the federation. Many prospective investors may opt to wait out this regime if these trends are not de-escalated!

Nigeria most likely entered an official recession as the second quarter closed in June 2016 probably contracting larger than in the first quarter! My firm estimates negative growth as large as minus 1.5 percent. Even though our projections expect a smaller contraction by Q3, and a modest growth in the last quarter, it is unlikely to be sufficient to avert a full year recession-perhaps full year decline around minus 0.5%. We expect based on trends from Q1 2016 that major economic sectors-oil and gas, financial services, real estate, manufacturing, government, construction, hotels and hospitality etc. would remain in recession in Q2, while only trade, telecommunications and agriculture may have sustained more modest levels of growth.

It is not all bad news however. By the time Q2 data is released by the National Bureau of Statistics (NBS), they will already be “lagging”- the two most important policies that squeezed the economy into recession have already changed and economic activity may have ramped up a bit. Those were the refusal to deregulate the downstream petroleum sector and abolish the fuel subsidy regime until the whole country and its economy was almost completely grounded; and the rigid and irrational foreign currency regime adopted by the presidency and CBN until very recently. Our researchers at RTC Advisory tried to measure capital market reaction to the change of those two policies and confirmed that both changes were market and investor positive though new factors (market illiquidity, BREXIT, financial sector challenges and continued concerns about policy sustainability, buoyed by the president’s own words) continue to keep capital markets down.

The minister of budget and planning has recently confirmed that so far, 2016 revenues are 45% below budget projections. We are not surprised as anyone following this column may have expected. We have always held the view that revenue projections based on oil prices, volumes and margins as well as taxes and duties may have been over-estimated in the budget projections. My sense is that the biggest flaw in current fiscal strategy is the over-reliance on borrowing in a context in which debt service is already 25 percent of the budget (and over 35 percent of revenue!) while there is no clear and concerted strategy for replacing lost fiscal investments with private capital. I frankly can’t understand why there hasn’t been a more open and aggressive attitude towards foreign direct and portfolio investment, privatization, PPPs, and strategies to leverage global private capital to replace government spending in the oil and gas and infrastructure sectors. I think rather than increasing debt servicing, a partial sale of government’s stake in NLNG, conversion of our oil sector JVs into incorporated JVs and privatization of FAAN may be more sustainable financing options. Q1 data from NBS suggests that FDI was trending towards zero in the first quarter and that trend is likely to have persisted or worsened in Q2. We however have cause to hope that the situation may improve somewhat with the new FX system and progress towards downstream deregulation. Nigeria has already moved from being the top receiver of FDI in Africa in 2011 and 2012 to being the sixth by 2015 and except policy averts current direction and run rate, we will be out of the top ten by year end (!) in the same manner we have dropped out of the growth leaders.

Most macroeconomic indices are also trending negative-inflation has reached 16.5% by June; FX reserves are down to $26bn and falling; exchange rates are on free fall; and CBN has had to raise its monetary policy rate to 14% in a bid to attract offshore bond investors back into the market. It’s an irony that we basically ejected those investors just a year ago with our vituperations and irrational anger at JP Morgan. I have been very critical of CBN in the last year, but now I am more charitable-the easy decisions are over; now every choice our monetary and fiscal authorities make will have costs and benefits that may be almost evenly matched! The most important issues now are resuming growth and employment and bringing back private investment, both local and foreign; and I suggest policy choices and trade-offs be weighted in favour of these considerations.

So back to my initial question-is the Nigerian economy in recession and will it recover? I think both! We are in recession and may first have more recession till at least Q3 2016. Then modest recovery may commence and dependent on policy and political risks, growth could accelerate. On the other hand, it is not impossible for policy makers to ensure we have a long period of recession and low growth!

Opeyemi Agbaje