Business in 2009

Last week we examined the policy implications of the current constrained economic environment. It is clear that the only way to avert the type of economic pressures Nigeria was subjected to in the 1980s and early to mid-90s is to change the policy direction (or lack of it) that the current regime has adopted since May 2007. It requires a return to an economic model that leverages and indeed actively seeks private capital from foreign and domestic sources; a clearly articulated development strategy that addresses the debilitating power and infrastructure situation; an assault on corruption and mismanagement of the budgetary and procurement processes that denies the Nigerian economy value-for-money even for the limited budget dollars that we appropriate; and it requires exceptional leadership at the Presidency and in the critical ministries, departments and agencies that impact on the Nigerian economy and on the conditions of our people.

There appear to be tentative signals that the Presidency is finally coming to an understanding of these requirements, based on the evidence from some of the recent actions of government, but then some consistency of action and “follow through” is required. Observing the volatility of the foreign currency markets in just two weeks of 2009, I was uncannily reminded of the early days of my career as a banking executive when perhaps seventy-five percent of management energies were directed towards procuring the forex needs of our clients. Those days seemed to have ended with the return of high oil prices, the build-up of foreign reserves, the 2005 Paris Club debt write-off, resumed FDI and portfolio investment, and the successful banking consolidation exercise. Today, we are reminded of the dangers of over-celebration. As I have warned long before in this column, our economic advantages though important were significantly “wind-assisted” by high oil prices and a bullish international economic environment.

Early in December while making presentations on the economic outlook in 2009 in several boardrooms and management meetings, I projected some Naira devaluation, at first to around N125 but before the middle of December, it was clear to me that we were probably going to be facing a more severe devaluation and we revised our average exchange rate for 2009 to N135-N140 to $. By and large, we stand by that projection, in spite of the volatility we have just witnessed. I would argue that the scenario in January was merely exacerbated by speculation and panic induced by the policy vacuum from the Central Bank. The financial markets hate lack of information! But one also understands Charles Soludo’s increasing hesitancy in leading policy debates. He burnt his hands in the currency denomination and dollar payment of state and local government revenues quagmire and perhaps will like to live his last days at the CBN in peace. With the Central Bank taking a clear policy position, the exchange rates will be moderated we believe to our projected range.

Beyond the exchange rate, business is concerned with the state of infrastructure-particularly power and transportation; the state of the financial sector, the availability of credit and interest rates; inflation and money supply; the stock market; government’s fiscal stance especially given the role of government in our economy; and the level of economic activity and GDP growth. What is the outlook in 2009 for all these variables? Nothing will happen to drastically change the conditions of our power and transportation infrastructure in 2009, but there will be some incremental improvements as the year unfolds. I believe there may emerge a better policy posture in power after an unduly long learning curve, but we now have a minister for power who should understand what is required. We also have the emerging outlines of a concessioning strategy for roads and an agency, the Infrastructure Concessioning and Regulatory Commission (ICRC) that can lead action in that regard.

I hold the view that the financial sector will be tighter in 2009. Banks will be dealing with several challenges-declining earnings, asset quality erosion and its accounting implications, bloated payroll (and possibly headcount), declining international lines of credit due to the global financial crisis, increasing operating expenses, paucity of attractive transactions, lower government revenue and a more difficult macroeconomic environment. It will be the first time since perhaps 1998/1999 that the sector will be dealing with such adverse circumstances and I am not convinced there is enough depth of skills and competences in the industry to handle these challenges. The implications will be tighter credit and higher interest rates! And for those hoping for a quick stock market turnaround, we have seen no reason to expect one before the latter part of 2009.

By and large, we support the government’s oil price budget benchmark of $45 per barrel, even though my firm believed a more prudent benchmark of $40 was more realistic. On the other hand, we recognise that some deficits may be tolerable in this recessionary environment to prevent a complete economic meltdown. There will be mixed inflationary pressures-Naira devaluation increasing input costs for producers and suppliers of imported raw materials and end-products but constrained government revenue and financial sector credit acting in the opposite direction. The final inflation outcomes will reflect the relative force of these countervailing pressures. We have predicted foreign reserves will be down to $50 billion or less by year end. That projection is now beginning to look optimistic with reserves already at $53billion in January!

Finally in December we advised our clients to expect GDP growth in the range of 4-6 percent. We stand by that expectation. The President’s budgetary projection of double digit growth may simply have been wishful thinking. With both oil price and volumes down, with supply and cost of credit constrained, with the manufacturing sector hobbled by power, we have only few sectors-agriculture, communication, trade and services to look up to. Those are unlikely to produce aggregate growth beyond 6 per cent.