Business in 2008

Business In 2008

This column’s name describes its interests-economy, polity and society-but our centre of gravity is the economy. The polity is important because politics and government are very important drivers of economics, and society is important because the economy was made for man, and not man for economics. Our interest in society sometimes takes us into the realm of faith and religion, football, international relations etc, because man is not complete except all dimensions of his being are nourished. But from this week, and hopefully if there are no important distractions, for the next few weeks we want to focus on the economy and business. What are the issues that will define business activity, and what is the outlook in 2008?

One major concern as 2008 already enters its second month and the Yar’adua regime its ninth month is the continued absence of clarity over the government economic and policy preferences. As I have mentioned on this page, the ‘Seven-Point Agenda’ is yet to be clearly articulated in an economic strategy and plan document that can provide a compass for all government activities, decisions and spending. The fact that the 2008 budget was prepared in this environment of policy vacuum may in our view already have compromised the quality (but not quantity) of spending in that plan. The speed with which the government completes its harmonisation of NEEDS 1 and 2 with the 7-Point Agenda and the Vision 2020 intent will be important in shaping economic and business direction in 2008 and beyond.

Unfortunately there are those who argue with some support that the pace of needed economic and governance initiatives from the public sector will not pick up until the electoral petitions against the President are resolved and the PDP convention is satisfactorily conducted. One could also add the on-going review of oil and gas policy, and the search for a policy to address the critical challenges in the power sector. The fact that virtually all other sectors-education, mines and minerals, health, FCT etc-are in review mode rather than inclined to entrench and extend the successful reforms carried out under the previous regime, while fine-tuning and adding integrity and transparency where these were lacking means that very little will be done to create a business-friendly environment in 2008.

In fact far from creating a business-friendly environment, some actually detect worrying snippets of a nationalistic, perhaps even socialist orientation towards the return of state-owned economic players. For instance, can the government’s policy preferences be discerned from the imminent licensing of NIGCOMSAT as essentially a state-owned telecommunications company, while the government raises its criticisms of the privately-owned GSM service providers purportedly on ‘quality of service’ concerns?; Are the on-going reforms in the oil and gas sector designed to strengthen the government’s hold on the upstream sector of Nigeria’s oil and gas activities, in addition to the downstream which government already controls?;

Do the reversals of the refineries’ privatisation without any announcement of a fresh privatisation process suggest a lack of faith in deregulated and privatised markets? What are the implications of the ongoing reversals of policy across board, most of which appear designed to roll back the private sector take-over of the ‘commanding heights’ of the Nigerian economy? Some even suggest that the banking sector consolidation which in our view was a huge success (although we believe the regulators and operators are gradually leaving the substance for the shadows) may also be up for review. Do all of these reflect an anti-free market policy orientation or as others argue simply a desire for regional and geo-political repositioning to regain lost ground? The answers to all these questions which will hopefully unravel explicitly or by conduct in 2008 will be a significant signal to local and foreign investors in the months ahead.

It is clear as we await passage of the 2008 budget that we are in for a period of inflationary or at least reflationary spending. The key budget price benchmark is likely to be fixed in the $59-65 range, up from $40 in 2007 and $35 in 2006. In addition the government proposes to release $4billion in prior savings from the so-called excess crude accounts for the states. Even before these releases, most of the states’ budgets have been significantly higher than the 2007 spending proposals. The implications of these are likely to include higher consumer demand and spending as government reflates the entire economy and the threat of higher levels of inflation. I certainly suspect that 2008 will end up with higher inflation figures than 2007 except the CBN can struggle through monetary measures to constrain the liquidity which the politicians will be releasing into the economy across the nation. This is more so, as a Supplementary Budget to address the power sector is also likely in the course of the year.

Which makes it all the more auspicious that the CBN is moving ahead with the development and implementation of an inflation-targeting framework as part of its previously stalled ‘4-Point Naira Agenda’. The bank should have an interesting time battling inflation in the next few years! One likely area of good news is the exchange rates which should stabilise or even appreciate, especially as the government implements the payment of states allocations in dollars, another one of the stalled Naira agenda. Readers will recall that this column supported those two particular proposals, and believes in a third element of that agenda-Naira convertibility-in principle, but not with regards to the Bank’s proposed timing.

With regard to economic outlook in 2008, we anticipate a lower GDP growth rate than the government hopes to see, in our view in the range of 7-7.5%, as oil prices remain around $80 per barrel, but with the critical energy constraints of business and economic competitiveness of Nigerian firms remaining unaddressed. The CBN policy of a uniform yearend for all banks will mean tighter liquidity not just for the banks but all borrowers and corporates as the banks all seek to call-in loans and strengthen their balance sheets at the same time of the year. Many economists continue to question the link between corporate earnings and the pricing of shares in the Nigerian Stock Exchange. If this concern becomes a mainstream one, then there may be risky times ahead for capital market investors. The more optimistic view is that perhaps those prices have factored in expectations of future profit growth, which in particular sectors may be justifiable. On the whole sensible investors will be cautious.



Mr Agbaje is Senior Consultant/CEO of Resources and Trust Company (RTC), a Strategy, Consulting and Business Advisory Firm.