Nigeria in 2010

The Great Recession of 2008-2009 is now, according to most data officially over. Taken as a unit, the global economy has stopped contracting even though some national economies, notably the British are still in recession. America has started growing again, though slowly, and the country’s finances and macroeconomic situation are still bad-growing deficits, huge debt, two wars and high unemployment. Asia is in better shape, driven by China and India, both of whom appear to have shaken off the recessionary flu. Emerging economies are generally doing better than developed ones, perhaps signifying an incipient shift in the global balance of power. The IMF subtly confirms the power shift-moving quotas from “over-represented” developed nations to “dynamic emerging economies”.
Nigeria, as corroborating data from the Central Bank of Nigeria (CBN), National Bureau of Statistics (NBS) and Economist Intelligence Unit (EIU) all confirm never went into recession-all of them put 2008 GDP growth around a range of 5-7% driven by the non-oil sector even as oil production contracted again in 2008. Amazingly NBS data in fact puts GDP growth in Q4 2008 and Q2 2009 at over 7%. Oil prices have recovered from the below-$40 depths it sunk to in December 2008 to an average in the last month of over $70 per barrel well over our $45 budget price benchmark and production is also reportedly rising as a result of the fairly successful amnesty programme in the Niger-Delta which has significantly reduced disruptions to oil production activities. The prospects for global recovery were briefly shaken as a result of the Dubai collapse and debt debacle but markets appear to be shaking off the panic that initially developed.
With regard to the financial sector, which was the origin of recent economic turmoil, consensus is gradually developing around some principles for regulating financial institutions going forward-tighter capital standards; curbs on compensation and executive pay; stricter regulation of derivatives, securitisation, hedge funds and rating agencies; risk-adjusted capital and profits; consumer protection; and the need for increased global coordination in financial services regulation. As a general rule, it appears Central Banks will be increasingly involved in directly regulating “systemically important” (meaning large) banks. Indeed if the Conservatives take power in Britain, as appears likely, the FSA may be abolished as the industry regulator and may become a consumer protection institution within financial services while banking regulation returns to the Bank of England. Many of these trends may manifest locally. Additionally, there may be a greater role for the Financial Services Regulatory Coordinating Committee, further industry consolidation and stronger capital market regulation. The insurance sector may also have to clean up its books.
The outlook for 2010 for Nigeria appears mixed, with positives and negatives. The most significant negative, as I highlighted last week may be increased political risk, as attention shifts from policy and governance to politics and elections. The risks associated with presidential health and succession remains high as is now becoming obvious. Macroeconomic and fiscal management may strain under the weight of electoral calculations; spending (and “quantitative easing”) may increase; inflation is likely to increase as money supply expands and oil sector deregulation raises transport and food prices. The credit crunch that is developing as a result of the loan write-offs and shock of recent regulatory interventions in the sector may also constrain private sector activity, at least in Q4 2009 and Q1 2010. Higher unemployment is likely.
But there are positives as well-the prospect of higher government revenue as both oil prices and production rises; the likelihood of some re-accumulation of foreign reserves and relative exchange rate stability; the fact that financial sector “toxic” assets have now been recognised and dealt with therefore increasing industry transparency; stock market prices may now have fallen to bargain levels (except that lack of confidence and liquidity and perhaps political risk may yet constrain recovery); the improving security situation in Lagos and the Niger-Delta which are responsible for most economic activity etc. Unfortunately the government appears committed to a wrong power policy-instead of completing the unbundling and privatisation of PHCN and encouraging private investment, the regime has chosen incremental growth financed by government. And even then, the 6,000 MW by December 2009 target is almost certain to be missed. Already officials are re-interpreting the target in terms of generated rather than distributed power!
We expect continued GDP growth in 2010-indeed given the prospects of higher oil production, the growth rate may even be higher. Government has given up on single-digit inflation, at least in 2010 as its own budget proposals targets 11.2% inflation. We think further Naira devaluation is possible. The EIU projects a N/$ exchange rate of N165 for 2010, which we think is not unrealistic. Regulatory standards are likely to be tougher across sectors and tax enforcement is also getting stricter. The social conditions of course remain dire-poverty around 54%, high unemployment, decrepit schools, poor healthcare coverage, the absence of a social welfare net while our population goes above 160 million people!